SME HOUSING DELIVERY Government policy impacts on SME housing delivery

Tony Mulhall

Tony is Senior Specialist, Land and Resources, at RICS. He has worked in a wide range of areas of planning and property in both the public and private sectors. He is actively involved in promoting an understanding of development economics within the planning system and has given evidence to the UK House of Commons Select Committee on Town Centre Planning Policy. He represents RICS on a number of bodies, including the International Federation for Housing and Planning. He has presented at UN/World Bank Conferences and gives occasional lectures at several universities.

This is an updated version of an article Tony prepared for Property Investor News some months ago. A lot has happened since then. Will government initiatives in the planning and environment spheres help SMEs? “Given government’s priority of building 1.5 million new homes by summer 2029, this should be the primary measure by which these initiatives are judged.” 

The relative decline of SME housebuilding 

Since the global financial crisis (GFC) in 2008, successive governments have been concerned to ensure their policies enable small and medium enterprise (SME) housebuilders (1-100 dwellings p.a.) to deliver more housing and faster. In 1988 small builders were responsible for 4 in 10 new build homes, compared with just 12% in 2015 (House Builders Federation (HBF) 2016). The GFC led to a significant shake out of the sector reducing the number of SME housebuilders and the output of housing from this subsector up to today. 

After just nine months in power, the Labour government published the Planning & Infrastructure (P&I) Bill intended to give legal effect to many initiatives already announced. More recently it has sought views on relaxing requirements for housing development below a certain size to reduce the burden on small developments. But will its measures be capable of boosting SME housing output to meet an ambitious housing target. Given government’s priority of building 1.5 million new homes by summer 2029, this should be the primary measure by which these initiatives are judged. The top two barriers reported by SMEs are: ‘delays in securing planning permission and discharging conditions’, as well as ‘a lack of resources in local planning authorities’ which has persisted for years (HBF 2024). 

The new government quickly produced welcome reforms to the National Planning Policy Framework (NPPF), surprising many with the speed of progress after assuming office. Multiple consultations and many working papers later, its intention to address blockages to development is not in doubt. But the positivity associated with the NPPF reforms announced in July 2024 faded with the Autumn budget of the same year. Primarily comprised of fiscal measures to stabilise government finances, it has a direct financial impact on businesses and their future outlook. 

The business case for development 

Often forgotten when addressing national housing need is the reality that house builders are first and foremost businesses. Private sector housebuilders need a justifiable business case to proceed with development. This business case must be maintained for the life of the project. Meeting target returns is how debt is repaid and future borrowing secured for the next project. 

Unlike the large housebuilder model, SME builders are largely funded through relatively short-term project specific finance. It is why the cumulative effect of planning obligations as part of overall costs have a greater impact on SMEs. As reported by the Competition and Markets Authority (2024) SMEs are acutely exposed to delays in the planning system, with the knock-on effect of increased exposure to market volatility reducing access to funding. Non-planning government measures or a failure by government to address issues in the wider economy, like inflation, may have a more immediate and material impact on the business case for SME developers than planning measures alone. 

It is against this backdrop that the impact of government planning and development policies on SME housing output is considered here. A unifying theme in the sector is that greater certainty in decision making in the planning system would be hugely beneficial. Certainty about planning expectations and certainty about the time frame within which planning decisions are taken, significantly reduce risk. 

Planning to reduce risk 

Reducing planning risk is about understanding what kind of development is acceptable, what is not acceptable, and what is open for consideration. Such clarity would help SMEs enormously to navigate the competing and sometimes conflicting objectives of the current discretionary system. 

In a plan-led system, the foundational document is an up to date local plan. Pressure from central government on local planning authorities to have up to date plans within 30 months will need to be rigorously applied. The current London Plan dashboard indicates 20% of local plans are up to date. This plan status is replicated around the country, where it is estimated that up to three quarters of local pans are out of date. 

The rationale advanced for not progressing plan reviews at present is the lack of a stable national planning policy environment. Nature Recovery Plans, for example, have been consulted on through the P&I Bill. Although these promise to provide a helpful alternative to mitigate environmental risk, there are many steps before a national government measure trickles down through the administrative system to arrive at an implementable local policy for 300+ local planning authorities at various stages of plan making. 

Already the expectation that all plans will be up to date in 30 months is regarded as fanciful with the competing pressure to introduce new Spatial Development Strategies, in what seems like the reverse order. Some local authorities may pause their local plan preparation while they await publication of the strategic direction, fundamental to investment and growth decisions. 

Yet this is the context in which SME housebuilders are required to engage with local planning authorities based on out of date plans, limited allocation of housing land, inadequate supporting data, and deferred decision making pending the adoption of a new strategic plan or yet another national policy change. 

Calls for reform to the planning system have understandably been tempered by pleas for government not to overburden an under-resourced system with changes which will take a long time to bed in and may not materially contribute to the delivery of 300,000 dwellings per annum. 

Planning administration reform 

While government is determined to accelerate the completion of local plans, it is not ignoring the need for effective decision taking at planning application stage. 

The UK planning system is a ‘discretionary’ rather than a ‘prescriptive’ one. Reports of late night sittings of planning committees after months of preparation of plans and supporting technical reports, but still not know what the outcome would be, are all too frequent. Many plan policies will have been adopted for their political appeal at a particular time, rather than their underlying evidential basis ultimately needing to be resolved at appeal. But many SMEs may not be able to afford the cost of appeal, together with the time it takes to get a final decision. 

The government’s planning committee reform plans are a step in the right direction and mirror approaches operating in other countries where applications are primarily decided by officials against clear objectives contained in the plan. 

These countries fulfil their democratic obligations at the local plan-making stage, which requires effective public participation to decide the objectives to be included in their local plan. But the new generation of local plans will take time to consult on and update to fulfil their purpose. 

Conclusion 

Clearly government has signalled its intention to remove blockages in the planning system, which will be beneficial to SMEs. The concern is that statements of policy and new acts of parliament in themselves may not be sufficient to meet the time scale government has set itself. Legislation these days is mainly enabling, with many months of regulatory design to follow. It will take some time for the benefits to come through at local planning authority level. 

In the meantime, what would be most beneficial to SMEs and for users of the planning system more generally, is a properly functioning legal administration of planning with the capability to co-ordinate relevant stakeholders and key consultees, to expedite decision making within a prescribed time scale. Although government is providing more resources to planning departments, the dramatic increase in planning applications required to meet the delivery target over the next five years - at the same time as updating local plans - will put the system under even greater strain than at present. 

How will such a protracted implementation of policy reforms help SMEs?