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East Midlands Chamber News

DNCC Member Features in Financial Times

DNCC member Fairgrove Homes featured in today's Financial Times in an article about the state of the local construction industry:

Small builders left to toil in shadows

Fairgrove, an East Midlands housebuilder, sold close to 50 homes a year before the financial crisis. It expects to complete on just 11 or 12 this year.

It is a small example of a big problem. The well-documented resurgence of the large, listed housebuilders has obscured the continuing struggles of their small to medium-sized peers – despite the market stimulus provided by government-backed schemes such as Help to Buy.

“We’re quite optimistic in terms of the market having improved,” says Steve Midgley, co-founder and director of Fairgrove. “Our problem is the planning system hasn’t improved and nor has access to finance.”

The family business has had no bank loans in five years. “It’s completely holding us back in terms of building numbers, which is supposedly what the country needs,” says Mr Midgley.

With the supply of new homes in Britain running at less than half the amount needed, there are concerns that production has no hope of getting close to the levels required without a return to health for smaller builders.

Susan Emmett, director of residential research at Savills, says: “Their decline since the downturn has left a massive gap. We’re never going to build as much as we need unless we get them back.”

In the past quarter of a century, the number of companies building fewer than 100 homes has gone from 12,000 in 1988 to under 3,000 today. Since the financial crisis, the market share of these developers has dwindled from 29 per cent in 2008 to 16 per cent at the end of October this year.

James Hulme, strategic policy adviser at the Housebuilders Association, which represents SME housebuilders, says: “It’s pretty catastrophic from the point of view of their part in the recovery.”

The struggles of SME housebuilders persist even as the wider sector returns to health after its sharpest downturn in decades. Help to Buy, which offers top-up loans for first-time buyers on new-build properties, has kick-started demand and prompted the bigger builders to ratchet up land buying and production.

Small builders, meanwhile, are struggling with a lack of finance, high levels of debt and what they see as onerous planning conditions.

Russell Armer Homes, a Cumbria housebuilder, is another SME that typifies the situation. Over the past decade it has gone from about 100 homes a year to about 30.

“From our end it has been difficult because, as an SME, you’re having to fund a large amount of the work in progress yourselves,” says Martyn Nicholson, managing director.

The nature of housebuilding means developers – and, if they have them, lenders – don’t see any returns until the first home is sold. “Unless you’ve got cash in place, you’re not going to move very far very fast.”

Analysts say banks are often unwilling to lend because the builders’ size, leverage, and the length of time it takes to get returns in the sector, mean that the groups fail to pass banks’ lending criteria.

After the crisis, the big builders – apart from Persimmon – used rights issues and share placings to shore up their balance sheets, an option closed to their smaller, private peers, who have been left carrying much of their pre-downturn debt.

Mr Midgley, who also chairs the small developers group at the Home Builders Federation, says: “We just feel held back all the time.”

Fairgrove was the first housebuilder to start work on a project backed by the government’s Custom Build programme, a £30m fund launched in July 2012. But it took until November to get through the planning process and start construction.

The government has brought in planning reforms to try to streamline the system, most notably the National Planning Policy Framework. Introduced last year, the tougher rules give the benefit of the doubt to builders appealing against planning decisions in areas where the local authority lacks adequate plans for development.

This policy has helped the number of planning approvalsrise more than a third in the past year. Taylor Wimpey, the UK’s second-biggest housebuilder by revenues, last month said it had won 100 per cent of its appeals this year.

Smaller builders say they are unable to benefit from this system because they cannot afford to go to appeal.

Ministers last week moved to further bolster the system, by proposing that when a council failed to deal with details on a planning permission on time, it would be automatically approved.

The government also announced as part of its Autumn Statement that it would consult on removing affordable housing demands on projects of 10 homes or less. These rules – known in the industry as Section 106 agreements – require developers to provide zero-margin homes as a condition of gaining planning approval.

The Bank of England has also refocused its Funding for Lending Scheme away from mortgages and towards business lending. The move wiped £1bn off shares in the big housebuilders, but could have a more positive effect on their SME counterparts.

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