Residential development – undersupply of SMEs?

It seems that both the Federation of Master Builders and the House Builders Federation have been producing reports on the barriers to entry in the residential sector for SMEs.  I discussed the FMB’s document here.  The HBF’s research seems deeper and it provides some really good insights into the residential development process from the perspectives of small builders.  Lots of issues are identified – some are expected, others possibly less so.   It’s probably worth repeating the fact that tn 1988 small builders were responsible for 4 in 10 new build homes compared with slightly over 1 in 10 today.  In just the period 2007-2009 alone, there was a one-third drop in the number of small companies building homes.  It’s also notable that the average permissioned housing scheme has increased in size by 17% in less than a decade.  The reasons for this long term structural decline that became particularly severe in cyclical downturns are not really addressed.  Not surprisingly, the research in the report is focussed on companies that exist rather than those that have disappeared.  However, the main problems seem to be

  • Planning – no surprise there given that it’s the HBF. However, it is worth bearing in mind that as the planning regime has become more complicated and costly – often for good reasons such as ensuring that new development does not have major adverse effects on ecology, transport, infrastructure, appearance etc. – the level of ‘planning risk’ has increased.  Large developers may seek such risk as a source of additional return and be able to diversify it.  Additional delays in getting highway authorities engaged or discharging pre-commencement conditions seem to have got worse.  This may not be a surprise given local government financing constraints.
  • The cost of capital tends to be higher for SMEs who rely on project finance and many lenders will steer clear of schemes that do not have planning permission.
  • Fees from utility (particularly water) providers can be onerous.

I’m certainly not doing the report justice here.  There’s a lot of detail in it and it provides a very convincing analysis of the specific types of risks faced by small developers.

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