Small builders, big burdens
To help meet the ambition – shared by Conservative and Labour – of building 300,000 homes each year, small and medium sized (SME) builders will need to build more houses than they do currently. Therefore, diversifying the housebuilding market by increasing the role of SMEs is a principle that enjoys support from across the political divide, and is the focus of a recent Competition and Markets Authority investigation (CMA). Yet the trends are in the opposite direction, from contributing 40% of all homes built in 1988 to just 10% in 2020, part of what the CMA refers to as a “persistently poor market outcome”.
Why has it become so much more challenging for SMEs to keep building over the last thirty years? Alongside land availability and funding, SME builders consistently point to planning as a major barrier.
The CMA found in its November working papers, that the cost per plot of achieving planning permission for a small site (under 50 units) was almost four times higher than that of a large site (>500 units). They conclude that there is an “inevitable tension between the costs that these policies impose on residential development and the viability of some residential sites and hence the supply of land”. So how have these costs changed and what do they mean for SMEs?
Our latest research for the LPDF and UTB (Small builders, big burdens) considered the impact of changes to the planning system since 1990 on SME housebuilders with a particular focus on those firms using outline planning permissions, before agreeing the more detailed permission through ‘reserved matters’.
Our conclusions – based on interviews with small businesses, local authorities and related experts – found that it now takes much longer to get an outline permission, increasing from around 13-14 weeks in the early 1990s to a year in 2023.
The associated costs have also risen. In the early 1990s, the broad costs estimated for gaining an early-stage outline permission would typically be £28,000 in 2023 prices. Now, seeking an outline permission on a similar site requires evidence from around 10-12 consultants at a cost of around £125,000 alongside a 72% increase in planning fees just to establish the principle of development.
Finally, there is much more uncertainty: the risk has increased. Whereas in the past, the principle of development could be agreed straightforwardly with detailed discussions to follow, ‘validation lists’ of what is necessary or advised now typically stretch to 30 separate assessments and come with guidance notes that can exceed 100 pages even at this initial stage. Allied with the ever-increasing politicisation of planning, this leaves SMEs that are dependent on smaller operating areas and fewer sites especially vulnerable, often subject to changing evidential hurdles and the realpolitik of sceptical local politicians.
Why is this the case? There have been significant advancements in our understanding and appreciation of the impact of development over this time, which has led in turn to a demand for more evidence to be generated and considered. However, despite the myriad ways in which gathering, sharing and analysing data and information has improved through digitalisation since the 1990s, the time taken to make decisions has clearly spiralled.
Our report concluded that a lack of resourcing, in local authorities and statutory consultees, meant that service level targets are consistently missed, with “extensions of time” regularly agreed to bridge gaps and maintain any momentum. This leaves SMEs unable to commit resources to start times and exposed to higher capital costs to balance this risk. Further, the politicisation of planning at the local level means that, in some local authorities, there is a disproportionately risk-averse culture of decision making where planning officers require significantly more evidence than would typically be required in order to inform local councillors on the merits of a proposal. This not only requires more evidence, but can leave SMEs – that typically operate in smaller areas – proportionately more exposed to politically motivated “shifting goal posts”.
This challenge is intensified as outline permissions are increasingly the principal route for many SMEs to build homes. In a plan-led system, local authorities are required to identify sufficient land that is suitable for housing development to meet their local housing need over a 15-year period. This gives the local authority a degree of control concerning the location of future development and developers a degree of certainty.
However, we don’t have good local plan coverage across the country and it’s getting worse; more than two thirds of local plans are out of date (over five years old) and this will likely rise to three quarters by the end of 2025. This means that areas with a combined need for around 180,000 homes annually will be with local plans adopted more than seven years ago. These areas are least likely to have a strong pipeline of allocated land that is suitable, achievable, and available for development. These are the local authorities where achieving outline permission will be a more important route to development for development in these areas.
The CMA draw upon our report in their findings and conclude there are three areas of particular concern in the planning process that contributes to the lack of housebuilding:
(a) Lack of predictability.
(b) Cost, length and complexity of the planning process.
(c) Insufficient clarity, consistency and strength of LPA targets, objectives and incentives to meet housing need.
As we set out, all three of these areas hit SMEs or those operating on fewer, smaller sites, particularly hard.
There are some reasons for optimism. The sector is embracing the Government’s digital planning reform which should improve and simplify plan making and increase transparency. The Levelling up and Regeneration Act brings in other elements to improve the effectiveness of the planning system, including consistency through use of national development management policies and improved use of design codes.
In our report, we called for some additional steps to help SMEs build more:
1. Outline permissions need to return to being outline; the expectation is to establish the principle of development not the details.
2. LPAs must look to allocate more small and medium size sites in local plans.
3. Tackling the resourcing crisis in local authority planning teams.
4. Greater clarity for statutory consultees on the nature and requirements for the evidence required for outline permissions.
Taken together, these steps could lead to a more diverse and robust house building industry with a varied set of housebuilders building more homes.