This post has been kindly provided by David Cross, the CEO at Sky House, and, offering as it does an honest assessment of the plight of the SME builder, I would urge everybody involved in planning and development to take the time to first read it and then to think about how we got here and what we can do about it.
In the 26 years I have been an architect I have watched the slow and almost total demise of the SME developer and housebuilder in slow motion.
Layer by layer we have regulated the sector beyond reasonable viability, to the point where building homes in large parts of Britain is becoming a state-sponsored affair.
The entrepreneur and maverick developer who was abundant in my early career as an architect is almost gone. The small builders who would pick up awkward little sites and deliver cool urban schemes, conversions or a handful of one-off houses are disappearing too.
From 2003 to 2008 my old architectural practice would have had dozens of these small builders as clients. Each might deliver only a handful of homes a year, but collectively they formed an important part of the housing market.
Then the Great Financial Crash (GFC) wiped out most of them.
Before that we had the buy-to-let (BTL) boom. Whatever you think of BTL now, in the early noughties it gave SME developers something incredibly valuable: off-plan sales. Those sales de-risked schemes and provided confidence to lenders.
The city living boom that started in the late 1990s flourished into the noughties and then crashed with the GFC. The development market took years to recover.
We also had what I would call planning speculators. They would option sites and navigate them through the planning system. Planning wasn't simple then, but it wasn't anything like as complex or expensive as it is today.
These people had a particular skill. They understood land, planning and risk. They would create consented schemes which small builders could then buy and build.
It was actually a great little ecosystem. Planning and technical skills on one side, construction skills on the other.
That largely disappeared after the GFC as money became tighter.
At Sky-House today we can easily spend £150,000 getting a 50-home scheme through planning, on land we already control through increasingly complicated option and conditional contracts, with absolutely no guarantee of getting consent.
In the old days an architectural practice might have had a drawer full of oven-ready schemes for small builders to buy and deliver.
That drawer is empty.
Post-GFC we saw the PBSA (purpose-built student accommodation) boom. Initially it attracted smaller investors and developers, then increasingly institutional capital looking for long-term income from student accommodation.
Again, there was a positive side to this. Students were moved into purpose-built accommodation in city centres, increasing urban density and potentially freeing up conventional suburban houses for families.
Then came concerns about the ghettoisation of our cities. Mono-culture neighbourhoods that could empty out every summer.
So planning policy responded by trying to control the amount and location of student accommodation and the mix of development.
A nice idea in theory.
Then house prices increased and affordability became stretched, so we created increasingly ambitious affordable housing policies.
10%, 20%, 30%, 40% and in some circumstances potentially 50% of a development can now be expected to be affordable housing. Social rent, affordable rent, shared ownership and other discounted tenures.
We all agree that we need more affordable homes.
The theory has always been that this cost comes off the land value.
Sometimes it does.
Sometimes it doesn't.
Landowners don't operate in a theoretical viability appraisal. They can choose not to sell.
And when the landowner decides the residual value isn't enough, the site simply doesn't come forward.
There are other unintended consequences. The New Homes Quality Code requires developers to make buyers aware of the tenure mix around the home they are buying. That's understandable. But anyone who has actually sold houses knows that buyers can be sensitive about what is being built next door to them.
Meanwhile, as our cities grew and councils became increasingly strapped for cash during austerity, more areas adopted Community Infrastructure Levy.
Again, the principle is difficult to argue with. Development creates additional demand for infrastructure, so development contributes towards infrastructure.
Another nice idea on paper.
Then global warming became the climate emergency and planning policy increasingly sought renewable energy, lower energy use, EV charging, green roofs, sustainable drainage, biodiversity improvements and other environmental measures.
Again, individually, most are perfectly sensible.
Building Regulations cover some of the same territory, but the planning system increasingly wants evidence at the application stage to demonstrate that objections can be dealt with before permission is granted.
So a planning application now comes with contamination reports, transport assessments, travel plans, refuse strategies, sustainability statements, Design and Access Statements, acoustic reports, archaeology reports, drainage strategies, ecology reports, biodiversity assessments, landscape designs, arboricultural reports, flood-risk assessments and sometimes construction details that would historically have been produced much later.
Then you get planning consent.
And start again.
Conditions need discharging. Reports are revisited. Consultants are reappointed. Details are developed. Legal agreements are completed.
All the while you just want to get a spade in the ground and start building some homes.
On a fairly ordinary 50-home urban scheme it can now cost us a cool quarter of a million pounds to get from identifying the site to being genuinely spade-ready.
And that is before you build anything.
The Home Builders Federation recently calculated that regulation, taxation, levies and construction inflation have added around £76,000 to the cost of delivering an average new home since 2020. For high-rise homes the potential increase is closer to £98,000.
To be clear, that isn't £76,000 of architects' fees. It includes £37,000 of material and labour inflation. But it also includes Building Regulations, Biodiversity Net Gain (BNG), the Future Homes Standard, taxes, levies and other policy costs.
It isn't difficult to see how we got here.
We've had planning conditions requiring developers to fund public transport incentives for new residents. On some developments that can include bus passes or sustainable travel vouchers.
Nothing individually sounds unreasonable.
That's the problem.
Almost nothing on this list is unreasonable on its own.
Net zero has pushed Building Regulations further. Better airtightness, more insulation, lower energy use, EV chargers, photovoltaics, heat pumps, MVHR where required, air testing, sound testing and increasingly sophisticated building services.
Again, I support the objective. We build zero-gas homes ourselves.
But somebody has to pay for it.
Overheating is now regulated too.
My concern as an architect is what happens when compliance is reduced to the cheapest standard solution. The volume builders will optimise their standard house types around whatever passes. Smaller windows are an obvious response to overheating risk.
The SME developer and architect may still fight to deliver light-filled homes with generous glazing, but every design decision now has another compliance consequence and another cost attached to it.
We could end up building darker homes that require more artificial lighting to solve an overheating problem, then add more photovoltaics to offset the additional electricity.
This is how unintended consequences happen.
Then there is Biodiversity Net Gain.
We are one of the most nature-depleted countries in the world. We need more trees, more habitats and more nature. I don't think many people in our industry would disagree.
Mandatory BNG now requires most developments in England to deliver at least a 10% increase in biodiversity value against the pre-development baseline.
Think about what that means in practice.
A national housebuilder can take a greenfield site containing hedgerows and habitats, build much-needed homes on it and then has to demonstrate a measurable 10% net biodiversity gain.
If it can't achieve that on site, it has to secure biodiversity units elsewhere or, as a last resort, buy statutory credits.
But brownfield can be even stranger.
We once bid £5 million for a former railway site in a central urban location. It was perfect for one of our gentle-density neighbourhoods. Around 150 new homes within walking distance of the city centre.
We didn't win it.
The highest bidder subsequently pulled out.
By the time the site came back to us BNG had become mandatory and the open mosaic habitat on the former railway land had become a major viability consideration.
Our bid became £2.5 million.
The site was withdrawn from the market.
150 homes disappeared.
The policy hadn't stopped someone concreting over a beautiful meadow. It had helped prevent the regeneration of a former railway site in the middle of a city.
That is an unintended consequence.
Archaeology is another layer that we're all fascinated by until we have to pay for it.
One of our relatively modest city-centre developments has incurred more than £150,000 of archaeology costs. Around £3,000 per home to excavate what we broadly knew was there, record it, analyse it and publish the findings.
Another site we own contains an old industrial shed. The residual land value for residential development is effectively negative.
So we'll leave the shed there and rent it out.
No new homes.
Our cities are full of small sites like this.
People ask me all the time why they aren't being redeveloped.
The answer is often incredibly simple.
They are worthless for housing.
Then add lawyers.
Option agreements. Conditional contracts. Section 106 agreements. Highways agreements. Funding documents. Building contracts. Collateral warranties. Sales documents. Leases.
Legal fees can easily reach £100,000 to £150,000 on a relatively modest 50-home scheme.
Nobody wants us building over beautiful countryside.
Brownfield first makes complete sense to me.
Regenerate forgotten areas. Repair streets. Reuse infrastructure. Build homes within walking distance of jobs, shops, schools and public transport.
But at the same time we have vilified buy-to-let investment, made off-plan investor sales increasingly difficult, demonised landlords and loaded cost after cost onto development.
And then we wonder where all the SME developers went.
The viability evidence is now pretty stark.
Zoopla's analysis found that development was unviable across 48% of the country, with another 16% only marginally viable. It found that average sales values could support new development across 64% of southern England, compared with just 13% of the Midlands and 10% of northern regions.
My own experience tells me much the same thing.
For us to deliver a new-build scheme in the Sky-House style, I broadly need £300 per sq ft.
In simple terms, a 1,000 sq ft home needs to sell for around £300,000.
In large parts of South Yorkshire that is difficult.
In somewhere like Doncaster, if the achievable value is closer to £250 per sq ft, my theoretical 1,000 sq ft house has a £50,000 viability gap before I've even started arguing about land.
You can make the house smaller.
You can strip out quality.
You can reduce the windows.
You can build on cheaper land.
But at some point we need to ask ourselves what sort of homes and neighbourhoods we are actually trying to create.
And this leads to the great irony.
Having regulated the cost of new housing beyond what many people can afford, we will inevitably need another mechanism to help people buy it.
A new Help to Buy in one form or another.
So the state increases the cost of building the home and then subsidises the consumer to buy the home.
Another merry-go-round.
The Government's ambition to deliver 1.5 million homes over this Parliament was always incredibly ambitious. Against current delivery and viability it looks increasingly difficult.
And when we don't build enough new homes, something else happens.
The existing housing stock becomes more valuable because supply is constrained.
So a draughty, poorly insulated, energy-hungry 100-year-old house can continue increasing in value while the brand-new low-energy home down the road becomes impossible to build because its development appraisal doesn't work.
Crap old homes shouldn't be unaffordable.
Apartments are another problem.
I completely understand why the Building Safety Act happened. Grenfell was a national disgrace and the old system failed catastrophically.
But the higher-risk building regime has introduced another expensive and complex process for taller residential buildings. Gateway 2 is a genuine hard stop. You cannot legally start building a higher-risk building until the Building Safety Regulator has approved the application.
For large apartment schemes, time is money.
If your finance costs millions of pounds a year, uncertainty over when you can start has a real value.
London apartment delivery has fallen dramatically. If the numbers struggle to work in one of the highest-value residential markets in the world, imagine trying to make them work in Sheffield, Rotherham or Doncaster.
In lower-value cities new apartment schemes can require substantial public subsidy per home to close the viability gap.
Then there is the buyer.
Service charges have increased. Building safety has frightened purchasers. Leasehold has become politically toxic.
So who is left to fund major urban regeneration?
Increasingly, institutions.
Build to Rent. Pension funds. Registered Providers. Local authorities. Forward-funded deals.
But institutional money needs scale. £25 million, £50 million, £100 million schemes. It also needs a return.
That return ultimately comes from rent.
Regulation influences the cost of the building and the cost of money influences its value.
Ultimately that influences the rent required to support the investment.
There is no magic pot of money hiding somewhere in the appraisal.
And this is where housing policy starts connecting with much bigger social questions.
Young people pay more of their income in rent. Saving a deposit becomes harder. Buying a home happens later. Families start later.
Housing costs are not the only reason birth rates are falling, clearly, but it would be extraordinary to pretend they aren't part of the equation.
This is the merry-go-round we have created.
Layer upon layer of well-meaning policies designed to solve genuine problems by putting another obligation onto the developer or housebuilder.
Each individual policy can be defended.
Affordable housing? Of course.
Building safety? Absolutely.
Lower carbon? Yes.
Biodiversity? Yes.
Better drainage? Obviously.
Better design? Please.
Infrastructure? Certainly.
Archaeology? Important.
Accessibility? Yes.
The problem isn't any single one of them.
The problem is the cumulative effect.
Every new requirement adds cost, risk, land take, professional fees, delay or uncertainty. Eventually the development stops working.
Then government introduces another policy, grant or funding mechanism to make the development work again.
We are reaching the extraordinary point where the state increasingly determines what homes can be built, where they can be built and what tenure they should be.
Then the state lends the developer the money.
Then the state provides grant to make the appraisal viable.
Then the developer pays money back to the state through CIL, Section 106 contributions, taxes and levies.
And soon, I suspect, we'll see another state-backed mechanism to help the buyer afford the finished home.
Homes England now operates the National Housing Bank, backed by government and with the capacity to deploy up to £16 billion of debt, equity and guarantees into housing and regeneration.
That is a remarkable intervention into what should, at least partly, be a functioning private development finance market.
High Street development finance for SMEs has become extremely difficult. Banks look at development and see planning risk, construction risk, sales risk, regulatory risk and political risk.
And frankly, who can blame them?
Grant is now the only way we can make some areas work.
The state pays the developer to build.
The developer pays some of it back through taxes, CIL, Section 106 and levies.
Another merry-go-round.
Britain apparently has one of the world's great service economies.
As someone who spent most of my career as a consultant before becoming a developer, what I increasingly see is a system of consultants employed to navigate the rules created by other consultants, regulators and policymakers.
Everyone is incredibly busy.
Everyone produces another report.
Everyone invoices the development.
And nobody has laid a brick.
There is no question that almost all these policies were created with good intentions.
That's what makes this so difficult.
Individually they solve real problems.
Collectively they are helping make housing impossible to deliver across huge parts of the country.
Look at the regeneration of places such as Sheffield, Barnsley and Rotherham. There has been some brilliant work.
But an enormous amount of it is publicly funded or publicly supported.
The maverick entrepreneur who was the hero of urban regeneration around the turn of the century, buying a redundant factory, warehouse or piece of derelict land and turning it into lofts, apartments, studios, shops and workplaces, has almost disappeared.
So has the little builder doing five houses a year.
The numbers prove it.
SMEs delivered around 39% of new homes in 1988.
By 2020 it was around 10%.
We haven't deliberately designed a housing system that only large organisations, institutions and the state can navigate.
But that is increasingly what we have created.
We need to stop assessing housing policy one regulation at a time and start assessing the cumulative impact of the whole system.
Not whether each individual policy is desirable, but whether, when you add them all together, anyone can actually still build the homes.
Because if the answer is no, we haven't solved any of the problems those policies were intended to fix.
And there isn't enough grant to go around.
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