Mind the gap: Are things looking up for SME housebuilders?

In a difficult housebuilding market, SMEs appear to be struggling much more than volume builders. CN explores what can be done to support smaller firms

It is no exaggeration to say that the contribution made to housing delivery in the UK by SMEs has collapsed in recent decades. According to a paper from Parliament’s Built Environment Committee published in 2022, in 1988 SME builders built 39 per cent of new homes. By 2020 the figure had dropped 10 per cent.

“While the industry as a whole has grown in recent years, housing delivery has increasingly relied on a smaller number of large developers,” the document says. “The number of SME housebuilders has approximately halved since 2007; many have been acquired by larger builders over the years or ceased operations.”

It’s a trend that Rico Wojtulewicz, head of policy and market insight at the National Federation of Builders, has been observing uneasily for years.

“The problem is the increasing complexity of housing delivery. The big boys can overcome it because they’ve got the capacity”

Steve Turner, Home Builders Federation

“We’ve seen more companies decide to cut their cloth accordingly, whether that be reducing the number of projects they put forward, reducing the number of staff members they employ or just shrinking as organisations,” he says. “Some people are leaving the sector entirely.”

The housebuilding industry as a whole is facing challenging times. Material price rises and new regulations have made delivering homes more difficult, while interest rate rises and the end of Help to Buy in March 2023 have weakened sales. Many of these challenges are significantly tougher for SMEs to weather. So what could the government do to improve the situation?

Planning

In a survey published at the end of 2024 by the Home Builders Federation and Travis Perkins, 51 per cent of SMEs reported waiting over a year to obtain planning permission. At the same time, 56 per cent of respondents reported a 30 per cent uplift in the cost of obtaining planning permission on the previous year. Indeed, for the fifth consecutive year – as long as the SME survey has been running – respondents cited planning as the main obstacle to delivery, with delays in the system and under-resourced local authority teams referenced by 94 and 90 per cent respectively.

Of course, developers of all sizes complain about the planning system, especially since savage cuts made to local planning authorities (LPAs) in the years of austerity cuts following the 2010 general election. For large housebuilders, the situation is no doubt highly irritating, but they have numerous projects on the go at any one time, so can depend on revenue from sales on live projects while other projects await planning permission. The same cannot be said for SMEs. “The problem is the increasing complexity of housing delivery,” says Steve Turner, executive director at the HBF. “The big boys can overcome it because they’ve got the capacity. But for small builders it has become increasingly challenging. Small builders just can’t manage with the level of cost and delay.”

“While we welcome and support the measures contained in the revised NPPF… we believe that the government could have been more ambitious”

Paul Rickard, Pocket Living

The government’s efforts to tackle planning backlogs tend to take a holistic view of the problem, rather than targeting support towards SMEs. For instance, it announced last summer that it will recruit and train an additional 300 planners in the public sector. “That’s nowhere near enough, but it’s a recognition that the lack of capacity within [local authority planning] departments is a major barrier to increasing housing output,” says Turner.

In December, the government also set out plans to delegate decision making for all but strategic applications to planning officers. Under the proposals, applications that comply with local development plans could bypass planning committees entirely. It also proposed the creation of targeted committees for strategic development and mandatory training for planning committee members.

“By empowering qualified planners to implement planning policies, locally elected councillors will have the time to focus on the more significant cases, effectively speeding up the planning process and reducing unnecessary delays,” says Victoria Hills, chief executive of the Royal Town Planning Institute.

Eleanor Deeley, joint managing director at SME developer Deeley Group, says the changes could prove transformative. “If you have a housing site allocated and you’re delivering policy-compliant affordable housing, you shouldn’t need to go to committee,” she says. “We have the issue where we are recommended for approval by the planners and then we get turned down at committee because local people don’t want more new houses.”

She adds: “It would be beneficial to our growth if things do go through that delegated route. If there’s more certainty about how quickly our planning applications can be determined and more certainty that they will be determined positively, that makes it more likely that we’ll expand because we’d be spending less on appeals.”

Housing association finances

Aside from planning delays, many housing associations’ finances are in a dire state. Housing associations are the main buyers of affordable homes delivered through Section 106 agreements between developers and LPAs. But in the past couple of years, it has been difficult for housebuilders to find a buyer for the affordable element of their schemes. In the HBF survey of SMEs, 80 per cent of respondents said this issue is a barrier to growth.

“If you’re an SME builder, in most cases securing development finance is reliant upon signing a contract [with a registered provider] for the Section 106 homes, because it gives the bank a level of certainty that they are going to get a return on that investment,” says Turner. “Larger developers are able to start on site because they are better able to access finance.”

And SMEs have more to lose when they can’t build out a site. “Obviously, the bigger companies have got more sites operating. For SMEs, if you can’t start a [building] site, you’ve invested all
the money in the land and planning permission and can’t get any return on investment,” Turner says.

When it comes to shoring up housing association finances, the government has been all but silent. “[The government] needs to somehow find a way to ensure that housing associations are able to purchase [houses through] Section 106 agreements by putting them on a sound financial footing,” says Turner. “But that would require funding and there are funding pressures across government.”

Deeley agrees. “Everyone is waiting for the spring Spending Review, but realistically the housing associations that we’re talking to are saying, ‘by the time [the money] gets to us it will be October, so we can’t commit until the back end of next year’,” she says.

The NPPF

One source of hope for embattled SME housebuilders is the revised National Planning Policy Framework (NPPF), which was published at the end of last year after months of consultation. Out of 243 clauses, one specifically mentions SMEs. It encourages LPAs to promote the development of small and medium sized sites, including accommodating at least 10 per cent of their housing requirements on sites smaller than one hectare. The guidance remained unchanged since the last version.

Many in the housing industry find much to welcome in the document, although some feel that the government has not gone far enough in terms of measures to support the allocation of small sites or SMEs.

“While we welcome and support the measures contained within the revised NPPF, including continued obligations for small and medium-sized sites to meet a minimum of 10 per cent of a local authority’s housing requirement, which does benefit SME developers, we believe that the government could have been more ambitious,” says Paul Rickard, managing director at London-focused SME developer Pocket Living,

Elle Cass, head of strategic built environment growth at SLR Consulting, is more bullish about the new guidelines. “It’s good to see smaller sites being championed as well, and by extension the SME housebuilders that will deliver them,” she says. “These housebuilders will play a crucial role in building the homes we need as a nation and have been long overlooked since many of them went out of business in the 2008 global financial crisis.”

Brian Berry, chief executive of the Federation of Master Builders, takes an opposing view. “The one thing that’s really upset my micro members is that they’ve frozen the 10 per cent allocation in the local plans for small sites,” he says. “One of the things that comes out strongly is the lack of availability of land for our members to build on. They need smaller sites.”

The NPPF also encourages building on low-quality greenbelt land – which the government calls the ‘greybelt’.

Phil Hooper, chief executive of Close Brothers Property Finance, wrote in the HBF survey that freeing up greybelt land could present opportunities for SMEs to build on “smaller pockets of land that are typically overlooked by Plc housebuilders.”

Rickard adds that the revised NPPF was a missed opportunity to think more creatively. “[The government could have created] a permission in principle regime for the development of small brownfield sites. That would deliver more homes, more quickly, while supporting SME homebuilders,” he says.

Moreover, he says the government could have introduced rules requiring that a certain percentage of permissions go to SMEs. “It needs to be target driven,” he says. “That would start to reverse the decline because if it is measured, it happens.”

So while SMEs support a lot of the measures the new government is bringing forward, most believe they will benefit the larger players more. More targeted support is needed to prevent the SME sector from declining yet further.