Tip of the iceberg for SME housebuilding

Finding £120million in missed broker fees

Research by the National Housing Federation has shown we need to build 340,000 new homes every year to meet the demand for housing. In March 2021, data showed that the number of new homes being built each year had fallen 11% from 244,000 to 216,490.

Last year, the Housing Minister Christopher Pincher, said: “SMEs have a key part to play by increasing their output, as the biggest home builders in our country will not meet the Government’s housebuilding target alone.”

To achieve this SMEs need to be supported and enabled to thrive, which has not been the case over the past three decades. In 1988, SME housebuilders brought forward 39% of new homes yet by 2020 this had dropped to 10%. This significant drop translates to a loss of at least 64,000 homes per year from SMEs with an annual gross development value (GDV) of £20 billion.

Research by Savills, commissioned by LDS Sales Guarantees, has shown there are plots for over 135,000 homes on SME-sized sites currently going undeveloped. If brought forward these homes would have a (GDV) in excess of £40 billion, representing six years of SME supply at current build rates.

Two commonly stated barriers preventing SMEs from delivering new homes are the availability of land and the planning process. Interestingly – some would say controversially – the LDS research shows that there are sites with planning available, but SME housebuilders are unable to fulfil their potential because of a perceived lack of financial viability which, in turn, inhibits leverage and access to funding.

LDS Sales Guarantees could transform viability by removing sales risk, opening up access to finance, and releasing 10% of the value to developers pre-construction. The research also found that a guarantee can reduce cash requirements by around 77%, trebling or quadrupling SME output. This means SMEs could bring forward 55,000 extra new homes, with a total development value of £24 billion, on an annual basis.

LDS estimates that the funding requirement – and broker opportunity – of an optimal SME sector is around £12 billion of new debt each year. This would create approximately £120 million of broker fees, not to mention the additional introduction fees LDS pays brokers.

As Lucy Greenwood, director of residential research and consultancy at Savills, said: “SME housebuilders have faced a number of challenges in recent decades, but there is positivity in the market. The potential is there for SMEs to increase their output if more can be done to help them deliver additional homes. Unblocking the financial barrier is a key step that will help enable this growth”.

Former Treasury Economist, Chris Walker, calculated that these 55,000 homes would support more than £12.9 billion in gross value added (GVA) per year, as well as supporting nearly 200,000 jobs in the construction industry. He states that LDS Sales Guarantees could help unblock the development finance barrier enabling SMEs to build thousands of extra new homes. Crucially, most of these would be net additional to the nation’s housing supply creating much-needed new homes for people.

In early 2021, LDS launched its unique online Sales Guarantee engine which allows brokers, lenders, and housebuilders to create an instant, bespoke guarantee using basic information only. In its first 12 months the engine produced over £1.9 billion of new proposals yet this is merely the tip of the iceberg of SME potential.

Rosemary Davenport, spokesperson at Homes England, said of the new research: “Following the financial crash there was a huge decline in the number of SMEs operating in the market, with the industry becoming increasingly dependent on a small number of big housebuilders. Whilst these play an important role, they cannot construct the homes the country needs alone, and their dominant position can result in reduced customer choice and the slower build out of sites.

“This report illustrates why we’re determined to remove the barriers SMEs face: freeing them up to get building and creating a more resilient and competitive market.”

Click here for the full digital Commercial Broker magazine