Small housebuilders struggle to fill balance sheet holes

Britain's biggest housebuilders have constructed record profits on the back of rising property prices and government incentive schemes - but their rise has left smaller rivals having to fill widening cracks in their balance sheets.

While household name groups including Barratt, Persimmon and Bovis recently reported pre-tax profit increases of up to 75 per cent, a lack of bank lending has left smaller groups warning of a fight for survival. In a recent National House Building Council survey, half of the small building companies questioned said banks' reluctance to lend had become a serious impediment.

This funding crisis has come about despite record low interest rates; a 20 per cent rise in housing starts in the past 18 months, according to the Home Builders Federation; and initiatives from some banks to address criticisms of their lending.

In October, Lloyds announced a £50m fund to back small housing developers by taking equity stakes in projects and, this week, Santander UK launched its own £100m building finance scheme.

"We've spoken to many small housebuilders and its clear they suffered disproportionately to the challenges faced by the banking market in 2008," says Steve Pateman, head of UK Banking at Santander.

Many went bust, unable to access equity and lacking the financial flexibility or capacity to develop sites. Land banks just sat there, says Mr Pateman, and many continue to do so today. "Small housebuilders are still struggling," he admits.

Builders' trade bodies suggest that politicians, having fuelled consumer demand after the financial crisis, must intervene - not least because small builders are vital to addressing the national housing shortage.

"Small housebuilders play a critical role because they can take on small plots of brownfield land that aren't worthwhile for volume builders," argues NHBF business development director Neil Jefferson.

He notes that while big builders have increased their volumes, and medium-sized builders are getting bigger, the re-entry of small builders to the market is far lower than in previous housing market cycles.

"Things are still very tough for those businesses, and the big players can't build the additional 100,000 UK homes needed per year on their own," he says.

According to the Lyons Review of UK housing, commissioned by the Labour party, the number of small housebuilders in England and Wales has been steadily falling. In 1977, 24 per cent of new houses were constructed by big companies and 58 per cent by small enterprises. Today, just 27 per cent are built by small builders. There are few signs of the trend reversing.

Some building companies believe George Osborne, chancellor, solved the wrong problem in last month's Budget, when he unveiled a 'Help to Buy ISA' to subsidise homebuyers' deposits by up to £3,000. He should have focused his efforts on tackling the obstacle-laden planning system, they argue, as this restricts small builders' ability to grow.

"We need supply side measures," says Jon di-Stefano, chief executive of Aim-quoted Telford Homes. "We need fixed timeframes and certainty in the planning process. There must be cross party support to change the planning system."

He says uncertainty over gaining planning permission remains "the major barrier to market for small businesses". Under the current system, it can take years for builders to get a planning decision and make any return on land investment. For many small enterprises, the wait is too long and requires too great a capital outlay.

"If a builder hopes to build 10,000 homes, they need 40,000 plots of land in the hope that one in four will be approved," says Charlie Campbell, an analyst at Liberum.

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His business used to build 50 units a year before the financial crisis. It now builds 35 and, in recent years, the figure has been as low as six.

"We have been ploughing on but it is difficult. What's frustrating is we have the ability to do more, but it's just not worth the hassle. Small builders could make a real difference to the housing shortfall."

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