Importance of key foundations to create housing
In recent weeks Scottish Conservative leader Ruth Davidson has called for eight “new towns” to be built to help address what she describes as the worst housing crisis since the aftermath of the Second World War. MSP Anas Sarwar, who will find out tomorrow if he is to be the new leader of Scottish Labour, wants a national construction firm to be formed and to have £ 20 billion at its disposal to build 25,000 new homes a year.
Meanwhile, the Scottish Government’s 2020 vision, Homes Fit for the 21st Century, contains a raft of initiatives to encourage housebuilding, greater home ownership and more affordable and sustainable housing. It includes a pledge to investigate new sources of finance and to “remove unnecessary barriers to investment” to meet housing needs.
There is little doubt that the delivery of homes to address a major housing shortfall is an emotive subject and one that keeps our political leaders on their toes, but political parties of all persuasions could give a welcome boost to the house - building industry if they focused on the credit restrictions being imposed on high street banks that otherwise could better support housebuilding projects.
Banks are required to hold significant capitalisation before they can lend to a “speculative” development. All housing projects are by their nature essentially speculative. This lending restriction means SME housebuilders struggle to access funds at a rate that is commercially viable. Not surprisingly, the banks’ attitude to lending is also impacted. How committed should they be to lend to housebuilders when there might be better and easier returns in financing a part of the economy that doesn’t require capitalisation of their balance sheet against such lending?
Such regulatory requirements are in direct conflict with the Scottish and Westminster governments’ stated policy to deliver more housing, and a clear tension exists that not only disadvantages a large number of SME builders, but reduces the potential supply of houses on to the market. Small independent and family owned builders tend to have access to their own funds to complete, say, five to ten units a year, while plc/ private equity groups typically have access to rolling credit facilities that underpin major housing develop - ments of scale. However, it’s the SMES in the middle, typically capable of building 100 to 200 units annually, who are being squeezed by the capitalisation conundrum and as such access to competitive finance.
If we take, for argument’s sake, that the average price of a new- build detached home in Scotland is £ 200,000, then a typical SME annual output of 200 homes would make a £ 40 million contribution to the economy. Multiply that over numerous underdeveloped sites and this represents a massive hole in Scotland’s potential GDP, not to mention our housing stock.
And if you go back 20 years, there are examples of local/ regional housebuilding companies that were then very much in the SME space and have now grown to be significant players and major employers. In the current climate it is going to be very difficult for wellestablished local or regional SME builders to make that leap forward and to mirror those successes over the next decade and beyond.
The real irony is that this stifling imposition on lenders mitigates against the pressing need for more homes to be built and contrib - utes to the ongoing housing shortage at a time when Scotland’s housing stock remains below standard in a number of key areas.
The Scottish and Westminster governments could make a meaningful contribution through representations on the relaxation of the funding requirements placed on lending for speculative developments. Capitalisation thresholds need to be relaxed if we are to encourage the growth of housebuilding SMES and to exploit their capacity to deliver more houses at a time when they are most needed. l Rodney Whyte is partner and planning and property specialist at legal firm Pinsent Masons
The delivery of homes to address a major housing
shortfall is an emotive subject