What’s happening to SMEs & what’s the impact of their decline?

In 1988, 39% of new homes in the UK were built by Small-Medium sized (SMEs) developers. By 2020, SMEs were building less than 12% (source: 2022, Parliament’s Built Environment Committee paper). Fast-forward to today, and that 12% is closer to 10%.

Between the medley of planning stipulations, low house sales, high construction costs and dicey finances, there is a lot for smaller, privately funded developers to contend with. That’s not to say these issues aren’t prevalent with PLCs, far from it. But PLCs are typically, by their very set-up, able to weather each crisis.

The lingering impact of the Bank’s sharp 5.25% interest hike in 2022, combined with how investors allocate capital, has squeezed SME margins to the point of making sites unviable to build.

The interest rate has yet to return to pre-pandemic levels, and construction costs are now a record 50% higher than they were in 2016.

Capital investors have also become risk-averse to putting a punt on SMEs, instead backing build-to-rent, co-living and retirement living developments. That means for SMEs developing for-sale projects, the challenge for capital is now more competitive and less is available. The financial implication is that there is a vicious cycle for developers to attempt to manoeuvre out of to deliver on necessary builds.

But perhaps the biggest financial challenge is that SME housebuilders face the same tax, infrastructure costs, CIL charges, section 106 contributions and compliance costs regardless of the scale of their developments.

Effectively, smaller sites and one-size-fits-all prices don’t allow SMEs to spread fixed costs. With less capital reserves to support them and no flexibility for financial cushioning, SMEs are having to offset the costs onto consumers or look inwards at ways to streamline headcount or business needs. Neither of which is an attractive alternative for the future of housebuilding.

And make no mistake, SME housebuilders are a vital part of the residential industry.

There are several reasons why SMEs must be supported. For starters, they:

  • strengthen communities by building on fringe plots that are overlooked by larger developers.
  • create jobs and apprenticeship schemes within areas that are often desperate for labour opportunities.
  • diversify and strengthen infrastructure in localities by enhancing the need for local shops, schools, GP surgeries, etc.

If that wasn’t enough, SMEs will often continue maintenance of the site. This means the experts who built the property can fix any issues that may arise. Whereas larger sites operate with contractors who build and then move on to the next one, meaning there is a lack of knowledge on the site.

Of course, it’s not just finance that’s a barrier. The recent Home Builders Survey by the Federation of Master Builders (FMB) reported that 50% of SME housebuilders found the UK planning system to be the biggest barrier. Consensus across the community is that diversifying into much-needed community and affordable housing would be an option if the financial, land and planning barriers were overhauled.

With SME housebuilders disappearing fast from the UK housebuilding scene, solutions well-versed by experts need to be actioned. These solutions call for:

  • tax relief for SMEs, particularly when they are best placed for development on brownfield sites.
  • a financial overhaul of CIL charges, taxes and levies that takes into account the size of the site.
  • easier access to capital – SMEs need investors to regain their faith in the necessity of these builds.
  • greater efficiencies when it comes to working with local authorities and processing applications.
  • further support from the government, with the National Planning Policy Framework being a good starting point, but not enough.

With less than 10% of sites being developed by SMEs, there isn’t time to procrastinate.

SME housebuilders complement major developers, with SMEs focusing on overlooked plots of land that often bridge communities and provide economic growth through work opportunities, affordable housing and improved infrastructure.

Smaller businesses, by their very nature, are pressed to be more innovative to make savvy decisions with less capital and resources at their disposal, and SME housebuilders are no different. We are at a critical point where the only option is to provide the help needed to see levels return to those seen 40 years ago.