Last week, hot on the heels of Cameron, Obama and other world leaders at the Nato summit, hundreds of property professionals involved in the residential sector gathered at Celtic Manor for RESI2014 to discuss the big challenge of the day — a solution to the UK housing shortage. I am sure the top 10 housebuilders were there and I imagine the debate was about unlocking land and easing the path for development.
The scale of the problem is eye watering. In 2005, when the predecessors to the Homes and Communities Agency were pioneering initiatives to solve the problem, the shortage of homes was estimated to be 600,000. Today, it is estimated to be 1.4 million homes. All the main political parties agree on the importance of increasing supply. It is only their proposed solutions that differ slightly.
Like most people faced with a big problem — for example, how to eat an elephant — the answer is almost never by large interventions. It is a bite at a time.
Traditionally, UK housing stock has been supplied by a mixture of large and small housebuilders. National House Building Council data shows that in 1990, there were about 10,000 housebuilders producing 30 homes a year or less. This figure was around 6,000 by 2004 and today it is less than 2,600. The small housebuilder acts locally, understands the sub-market in detail and targets the purchaser very carefully. Small housebuilders often produce high quality stock and many have a hands-on role on their projects. They have a personal relationship with their purchasers and a local reputation to maintain.
While ease of achieving planning consent is often cited as one of the main requirements to promote supply and it has apparently become easier to get consent, the small builder has been disproportionally disadvantaged by the scale of changes in the planning process in recent years.
When I started my career, the simple red-line plan outline application and the chat with the planning officer gave you a lot of comfort before you embarked on the cost of a full planning application. Outline consent was usually sufficient to start to raise finance for a project. Now even the most straightforward of applications require a considerable number of supporting statements and studies. I recently looked at one local authority’s planning application website which, in addition to the various plans required and the usual flood risk and biodiversity statements, required up to 31 additional studies, from air quality to utilities. This was in addition to a pre-negotiated 106 agreement. The process is a huge drain on cashflow for a small builder and the volume of information flowing into the planning department may explain why it is difficult to derive any confidence and comfort from a pre-application conversation with planning officials.
At RBS we are passionate about supporting SMEs and with our owned land we have developed a variety of models to support small builders. We have invested in an experienced planning and development team supported by a variety of planning consultants to ensure we get an appropriate consent that can be tweaked if necessary by local builders. We try to sell land with the benefit of consent but we have also developed a variety of models, from joint ventures to delayed purchase or deferred consideration, to help the development’s cashflow.
It occurs to me that there are few areas of the economy where demand is so apparent and where supply has not responded to meet it. My own experience of looking after large strategic land banks is that, even with goodwill and perseverance, many of the larger sites, even in London and the South East, where shortages are most acute, can take 10 to 15 years from first idea to first home.
In the meantime, how do we support small builders with that first equity to get through planning risk?
I know of at least two legends of the housebuilding sector who act as “investment angels” to smaller housebuilders. It occurs to me that with such strong demand for the end product, more formal investment vehicles could be created to help that vital first stage before traditional debt funding is available.
So when Peel Hunt’s UK House Builders — Ten Reasons Why pamphlet hit my desk this week, I was not wondering which buy recommendations I agreed with but why there aren’t more co-funds or crowd funding or more innovative ways to support the equity needed to help small builders. After all, a glance down the list of the top 10 shows a number of them were made up of, or led by, individuals who not that long ago — within less time than it takes to bring a big strategic site forward — were considered small. It could be part of the answer to the UK housing shortage.
Helen Gordon is global head of real estate asset management at the Royal Bank of Scotland