Brighter days on the horizon for Scottish housebuilders as market for new builds recovers

It’s long been said that housebuilding is not an industry where you can easily turn the tap on or off, due to the long term nature of the business, complex supply chains and the planning process. However, following the pandemic, this is exactly the position we find ourselves in. 

Last year the entire housing sector came to a stand still to reduce the spread of coronavirus and ensure the health and safety of the nation. Unfortunately this lockdown came at a time when the housebuilding industry had been motoring at pace –in the year 2019-2020 (April-March), just before lockdown, we saw the highest number of new build completions (21,764) and starts (24,640) in Scotland since the financial crash of 2008.

COVID KICKED THE LEGS OUT FROM UNDER THE SECTOR
All of the momentum from the market came to a standstill during the first lockdown of 2020 (Q2), with the number of new build completions and starts plummeting by 85% and 83% respectively on the previous quarter. 

Despite opening up again in June 2020, the strict guidelines and restrictions which needed to be in place imposed further delays and hampered productivity on site.

While the supply of new homes has been decreasing, the demand to move and buy has sky-rocketed. 

In May 2020, a month before the housing market was due to reopen, the number of London-based buyers registering in Scotland jumped by 70% compared to the first three months of the year according to Savills. 

In the first week of June 2020, buyer demand (measured by the number of inquiries on homes) for Scottish property had recovered to 87% of the level it was at the end of February, according to Zoopla (27% higher than the buyer demand level in England).

When supply and demand diverge in this way, it stands to reason house prices will rise, and that is what we are now seeing. Over the course of last year, to March 2021, house prices rose by nearly 11%, according to the Office for National Statistics - the highest price inflation for 14 years. 

ACCELERATION FROM A STANDING START
To curb this inflation and normalise the market we must kickstart the housebuilding sector back to the levels we saw pre-pandemic, but it’s tough to do from a standing start. 

While the sector as a whole is not known for its agility, small and medium sized enterprises (SMEs) are the exception, and it is the SME housebuilders who have the power and ability to turn the supply tap back on, and quickly.

We have been supporting SMEs in Scotland for 13 years and can testify to their ability to be flexible and operate at speed. 

Their supply chains tend to be local and shorter, plus the sites are smaller, so they can build them out quickly and not phase sales or delivery. 

There is however, one significant issue with SMEs building us out of this housing supply shortage, and that is the number of SMEs has been on a downward trajectory. 

In the decade since the 2008 financial crash, the number of SME housebuilders across the country has dropped by nearly 40% to 465 companies (Homes for Scotland). 

Dr John Boyle, Director of Research & Strategy, Rettie & Co, comments: “One of the biggest fallouts of the 2008/09 recession was a dramatic decline in SME house builders. We lost over one-third of such companies from 2007 to 2009 and they have not been replaced.  This has consequences for development delivery, diversity, choice and competitiveness. Getting more SMEs back into the building game is very important in improving the industry’s capacity moving forward, but it can also boost its innovation and speed of delivery.”

Reversing this decline needs to be a key priority for decision makers. Increasing the number of SMEs will not only boost the supply of new homes, but also bring a wealth of other positives to our communities. 

These businesses are pioneers in innovation, sustainability, design and technologies and they are also more efficient in their use of land, utilising small, disused or complex sites which their larger peers overlook. SMEs also prefer using local supply chains and create local employment opportunities for young people, with all of our research showing that they employ and train more apprentices.

Consistent and reactive support is key for growth in the SME market and that is something which has been difficult during the pandemic. At Close Brothers, our doors have remained firmly open, when many others closed, and we are currently funding over 20 SME Scottish Housebuilders. 

As part of the FTSE 250 Close Brothers Group, we have the financial stability and resilience to ensure we are supporting our existing and new clients through the cycle – both in good times and bad - and the last year was no different. 

We understand the important role SME housebuilders play in strengthening the wider economy, as well as boosting housing supply, and we are proud to support them as a trusted financial partner in every way we can. 

With the lockdown restrictions subsiding and as we return to a ‘new normal’, we must take time to think about how we want to rebuild - to create a healthy, sustainable housing market, which benefits our local communities. It is our hope that SMEs will play a major role in this process, and we at Close Brothers will remain by their side, supporting them as they grow and thrive. 

If you are an SME housebuilder and would like to discuss development finance options, then please get in touch with James McHugh, Director, 07590 000 994