A big idea can be about small things

  

We are awash with high-minded political ambitions at the moment. As with any pre-election build up, our aspiring leaders lurch from pronouncement to pronouncement trying to catch our imagination. Electioneering is about selling a dream; hopefully one that a majority of voters share and a belief that we have found the man or woman who can deliver it.

Residential has received an overweight proportion of attention this time around and rightly so. The country’s housing supply challenges are enormous and a lack of housing affordability is consistently cited as a clear risk to future economic stability. Although the attention is certainly welcome, most industry practitioners look at the ambitious home construction targets as little more than fantasy. It can feel pretty detached from the genuine solutions we expect and deserve from our future political leaders.

So here’s a thought. It certainly isn’t original, but it is a different ‘big idea’; one about small things.

Don’t Forget About S(ME)s
Specifically, I’m on about the need – nay, opportunity – to support small and medium-sized enterprises (SMEs) in the housebuilding and development sector with the one big challenge they have faced since the downturn. Development finance has been pretty scarce, especially outside London. Post-downturn, the risks have been too great and many of the former mainstream lenders in this space have either exited or significantly downscaled loan books. As a result the number of SMEs (defined as those delivering less than 100 units per annum) has fallen from close to 6,000 at the top of the cycle to less than half that level today, according to the Home Builders Federation.

That’s not great news for sector employment, nor does it do much good for market competition and design innovation. In the context of solving the supply conundrum, this represents an annual loss of some 30,000 units from small sites; sites that are generally too small to be taken up by the PLCs. In terms of housing supply additionally, supporting the SME sector is one small idea that can have a big impact.

It Pays to be Big
Let’s look at the maths. A traditional development finance lender might seek 1-1.5% of a loan amount, on the basis of a 40% equity contribution towards total cost. The equity requirement is already a big problem for SMEs and might need to be bolted to additional security – including sometimes the family home or other personal assets. 

However the up-front costs of planning and professional fees do not float much with scale, meaning the hurdle rate to development for SMEs is higher and the risks larger. SMEs are also less likely to have the capacity to run multiple sites concurrently as the PLCs can do, spreading the uncertainty of planning risk and diverting resources to bolster any capacity gaps as needed.

Government could do much to simplify planning requirements for small schemes and perhaps offer pooled resource to be tapped for more complex projects. However as a recent NHBC survey pointed out, the central challenge facing SMEs consistently comes back to funding availability and onerous terms.

Thankfully there appears to be a few white knights out there. In October 2014 Lloyds Bank announced that it has been exploring ways in which the SME sector can be further supported. Its recently announced Housing Growth Fund will invest £0.5m - £3m of equity alongside the SME housebuilder. Santander also appears to be looking at the space through its Breakthrough Growth Fund.

These are welcome moves and it is positive to see them coming from the banking industry. It’s a personal hope that regardless of the blend of politics, post-election we see an earnest attempt to identify the pragmatic solutions to the UK housing crisis. And just sometimes – maybe it’s the small things that matter most.

This blog entry by JLL Head of Residential Research Adam Challis was taken from his regular column he writes for Estates Gazette.

 

 

Will McKintosh
Joint Head of Residential, MENA
+971 4 426 6911
will.mckintosh@eu.jll.com

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