LDS – Written evidence (UKH0100)

3. Does the Government’s target of 300,000 new homes per year accurately reflect housing demand? Is this target achievable?

• The fact that house prices are consistently rising above inflation is not an indication of a buoyant housing market but rather an imbalance in supply and demand.
• This has been caused by a growing population and reduction in the delivery of new housing stock.
• A significant reduction in SME housebuilder output is a key factor, with SME output reducing from 39% of total supply in 1988 to just 10% in 2020. This equates to the loss of 64,000 homes per year with a development value of £20bn (based on SME output of 39% vs 10%).
• Taking this fact alone into the equation, it is easy to see how the current housing crisis materialised and that a target of 300,000 new homes per year not only reflects current demand but also a significant backlog.
• For the target to be achievable, with PLCs at capacity, reversing the decline in SME housebuilding will be key.
• LDS recently commissioned Savills to investigate the total available SME market and key blockers to delivery. Unsurprisingly, this report (attached) identifies two major constraints: land availability and planning. It also spotlights development finance viability, with 41% of Federation of Master Builders survey respondents (2020) identifying this as a major constraint. Furthermore, 33% of those surveyed stated lending conditions have continued to deteriorate over the past year. And when rating lending conditions (where 5 is excellent), the average score fell to 1.98, down from 2.15 in 2019.
• Financial viability encompasses critical success factors such as availability of equity and debt, access to materials and labour, and the ability for SMEs to maximise their development capacity. All of which can be a significant blocker for SMEs as they don’t have the national housebuilders’ buying power, resources or influence.
• The key to reversing SME decline lies in bespoke solutions aimed specifically at SMEs. Solutions that are simple and straight forward, tech driven and that remove blockers that are unique to SME developers, rather than aimed at the market as a whole. 
• Current support, such as the Home Building Fund, are considered too bureaucratic and time consuming by SMEs. HBF director of communications, Steve Turner recently stated “Facilitating SME involvement presents a different challenge to that of the larger builder as the bureaucratic requirements are the same whilst the capacity to deal with them within individual companies is not as great”.
• There is clear evidence of the impact of this in Homes England’s own figures, which show the value of loans agreed through the Home Building Fund reducing by 44% last year.
• Turner goes on to say “even though the industry as a whole has delivered record increases in housing supply in recent years, SME activity remains stubbornly low in a system that requires scale and balance sheet capability to succeed. Support in accessing development finance, perhaps through a guarantee scheme and a fundamental de-risking of the planning process could help reverse decades of decline in SME numbers”.

5. What can be done to ensure there is a good balance of new homes where they are needed across the UK?

• SMEs are well positioned to provide a good balance of homes where they are needed in the UK, as they build locally and tailor their schemes to specific and unique requirements for the area in which they focus or live.
• They are well informed by demand locally, as well as availability of smaller pockets of viable land.

7. The Government has published its proposals for reform of the planning system. How can the planning system be shaped to meet housing demand?

• From a planning perspective, bottlenecks in process can significantly impact timely delivery of sites. A lack of service level agreements for planning councils, result in a lack of ability to accurately plan and drive efficiencies.
• Whilst it is understandable that planning authorities are rigorous in process, for many SMEs, the planning system itself is a deterrent. There appears to be no accountability for working with SMEs to support a speedy and frictionless journey through the process, which is what they need. There is currently no incentive for planning authorities to speed the process up. This is something that SLAs and associated penalties would address.
• Even with permissions in place, pre-commencement arrangements can take months. We are currently working with a development in Duckinfield which is in its 18th month of ongoing delays. Such unpredictable process has significant impact on the viability of some SME schemes and is a big consideration when assessing capital and interest costs associated with a delayed scheme.
• National housebuilders have internal resource to help drive the planning process. In comparison, SME housebuilders are time and resource poor so streamlining the process would benefit them immensely.   
• Although planning may currently be slow and arduous, the LDS/Savills research identified that almost 90% of planning applications were approved between October and December 2020.
• Planning permissions have risen steadily over the last decade, peaking at over 350,000 a year toward the end of the 2020, but only c. 200,000 homes were built.
• Further analysis by the Local Government Association reveals that more than 1.1 million homes that were granted planning permission in England in the last decade are yet to be built.
• These facts point to financial viability being the bigger problem, not planning.

How might changes to Section 106 agreements shape the provision of social housing?

• Section 106 agreements are a great way for councils to increase their revenue from a planning scheme to put towards benefitting the community. However, they do affect the financial viability of sites because it impacts the overall cost and resulting profit of those sites.
• Typically, one of the Section 106 requirements on a site will be a certain number or percentage of affordable housing units.
• This can present an additional challenge for SME housebuilders on a small scheme, because housing associations often don’t want to purchase a small number of units, and the site may be too remote or out of the housing association’s regular areas, which makes the properties more difficult for them to manage. This means that SMEs can struggle to sell those affordable housing units on.

How should communities be engaged in the planning process?

• Engaging with communities and providing them with opportunities to support or object to a development is incredibly important. However, extending the powers of communities could cause significant difficulties for the building of new homes, slowing down the supply of housing or obstructing it completely.
• When increasing community engagement NIMBYism is a key consideration. Whilst most people would agree that more housing is required, when considering the impact on them personally or to their own local community self interest and local politics usurp national or even regional interest.
• If communities were given extended powers, SME housebuilders would be the hardest hit. National housebuilders can park delays on problematic sites and start work on another scheme or a different location.  SMEs do not have this luxury so the impact of time delays and additional consultation is detrimental to jobs and cash flow, not to mention the possibility of bringing forward homes.

9. Is the workforce equipped with the professional, digital and other skills required to meet housing demand, for example in the construction, planning and design sectors? What can be done to overcome skills shortages?

• There is a significant gap between the skills held by national and SME housebuilders.
• SME housebuilder workforces tend to consist mainly of building and construction skill sets, which is invaluable on a site but does not help to overcome and navigate the tricky issues of financial viability and acquiring planning permissions.
• The smaller housebuilders are less likely to be able to employ a wide range of people with a variety of complimentary skillsets and experience bases, whereas the nationals can afford to do so. 
• The business model for most SME’s is to acquire staff or sub-contractors on a site-by-site basis. Existing constraints (due to unpredictable timescales for planning and pre commencement conditions), mean that in most cases, SME’s recruit those who are available and affordable when they have the go ahead to build.   
• To overcome the skills shortage for SMEs they need easy access to information, advice, additional skill or resource and help accessing benefits from economies of scale that would not usually be available to them.

11. What are the main opportunities and areas of innovation for meeting the UK’s housing demand

• There is a huge opportunity to significantly increase the UK’s supply of new homes by reviving the SME housebuilding sector and unlocking smaller schemes.
• The key is to ensure that the opportunities that present themselves are fit for purpose to support SMEs with their very specific needs.
• The LDS Sales Guarantee is an example of delivering against the specific needs of SMEs. Generated by a proptech engine LDSyoursite.com, an instant proposal is generated with minimal effort and basic information. Analysis has shown that the Sales Guarantee can enable an SME developer to create 3-4 times more housing output with the same equity than via traditional routes. Boosting the existing SME housebuilding figures by these multiples could bring forward 77,210 new homes, with a development value of £24bn each year. 
• LDS is committed to developing further products to support SMEs where they need it most and has just launched a bespoke product with a development finance lender, offering a guaranteed exit and consequently much better terms than could previously have been offered.
• The Sales Guarantee has also proven to convert previously marginal or unviable schemes and reduces up front development cash contribution by 77%. This is proving transformative not only to existing SME housebuilders but also empowers new SMEs to enter the market.
• Evidence that this is the kind of support SMEs are looking for is provided by the fact LDS has issued over £1.3bn of Sales Guarantees YTD, since the engine launched earlier this year.
• Additionally, LDS is currently developing a resource tool for SMEs to easily help plug gaps in knowledge or resource.
• To conclude, SMEs need solutions that are immediately commercially transformative. That are quick and easy obtain with benefits that are compelling and clear. Otherwise, most SME housebuilders simply don’t have the time, resource or energy to unlock the potential benefits.

September 2021