Real opportunities for SME developers or a pipe dream?

In April 2024 the Labour Party announced their pro-development housing plan reforms and their bold statement setting out their ambitious target of building 1.5 million new homes with at least 50% being affordable housing.

However, whilst the Government has set out its ambitious plans, it has not mentioned how it will step in to assist small to medium enterprise developers (SME developers). It is worth noting that since 2010, there have been over 15 housing ministers and it appears not one has been able tackle England’s housing crisis.

A consistent grievance emerging from SME developers is that the Government is setting itself up to fail, SME developers are struggling, national large scale developers’ building volumes have dropped and there doesn’t seem to be any plan for the new 1.5 million target. Over the last five years, SME developers have been feeling the brunt of draconian policy changes such as increasing obligations under Section 106 Agreements, proposals to stop land banking, mandatory affordable housing quotas and infrastructure levies and the Future Homes Standard requirement for new homes to be zero-carbon ready by 2025.

However, the overriding issue affecting almost all SME developers is access to finance. SME developers are finding it difficult to prepare viable business plans and as a result, appraisals are not adding up. If a SME developer’s margin is 8%, many lenders will think that is too small a buffer. With stricter lending criteria and high interest rates, it is now increasingly difficult for SME developers to secure funding. It is therefore no surprise that there has been an acceleration of SME developers exiting the sector, with fewer than 2,500 SME developers remaining (down from 12,000 in the late 1980s). So, who will be left to build these 1.5 million new homes?

Firstly, there are obvious shortages of labour as Brexit led to an exodus of much-needed construction workers. While UK unemployment rates are, by historical standards low, this is because a quarter of the potential work force is still inactive. The Government needs to get inactive people into employment and, for the housing market, this means attractive construction apprenticeships, decent pay and good working conditions to attract young people to the industry. This also includes encouraging more women into construction, but that is a topic for another day.

Ongoing issues for SME developers as a result of Brexit, the pandemic and consequently supply chain issues has inevitably led to unsustainable inflation and interest rates. This is in turn has significantly pushed up costs and affected the whole economy. Both customers and SME developers have felt the increase in building material costs, but a question follows, will we even have the materials for the scale and build to meet the target of 1.5 million homes?

We also have a notoriously slow, uncertain and complex planning system, where delays and additional costs are a huge liability for developers. The increase in planning application fees and reports is simply not enough to tackle the existing backlog and speed up future applications. There needs to be significant funding to local planning authorities for resources to manage the potential increase in planning applications. More specifically, SME developers need additional support and assistance to ensure applications are managed efficiently from submission stage to committee stage.

Environmentally, the land identified for building may also be contaminated and require clean-up and remediation which is a major cost for developers of all sizes. The Government seems to have underestimated the costs of servicing land and therefore vastly overestimated the value of uplift in the process.

The National Planning Policy Framework (NPPF) proposes ‘golden rules’ for developments such as 50% affordable housing but fails to explain how that large increase can be afforded. Developers’ appraisals are already stretched very thin and dumping additional costs on SME developers will mean fewer houses, not more. The NPPF also mentions that necessary improvements must be made to public infrastructure to support new housing. This includes new schools and nurseries, GP surgeries, transport links and care homes. It is difficult to see how that new infrastructure can be paid for and a complete rethink on how to fund infrastructure is needed, particularly where public services may already be overwhelmed or where grey belt land is likely to be in less-than-ideal locations for developments with poor transport links and connections.

The revised NPPF is set for a significant overhaul which is necessary for the Government to meet its ambitious housing target. However, it is yet to be seen how the Government will help our SME developers who are fighting to survive following years of economic uncertainty. There is a feeling amongst commentators that there is a lot of negativity coming out of Government and the Prime Minister’s comment “it will get worse before it gets better” continues to leave people feeling nervous and fearful. Feelings we have continued to endure over the last five years.

It has been challenging, but with a new Government, new plans and reforms, there is a glimmer of hope that the significant change in restrictive legislation will lead to a much-needed boom (or tremble) in construction. However, it then raises the question, with rising rents and deposits costing more than annual salaries, who can buy these new homes?

We understand that the sticking point for our SME developers is not the number of new homes they are able to build, but instead, how many they need to build to make the best profit so they can stay in business. Today, SMEs build only 10% of the UK’s housing stock and this will only continue to fall unless we support privately owned SME developers building beautiful homes for their community.

At Newmanor Law we have an experienced team of commercial property development solicitors who can guide and advise you in all stages of your development with experts in finance, construction and environmental law. Please do get in touch if you have any questions.