KEY LEARNING POINTS
Private landowners, builders, developers, housing associations and other organisations can play an important role in helping to meet local demand for private homebuilding. They can do this by directly facilitating new development opportunities, or by working in partnership with a council
The development of custom and self build homes can be profitable and it can generate new business opportunities, especially where there is established local demand. Councils should understand the benefits, so they can encourage potential partners to get involved
Make information from demand Registers available to partners. This reduces marketing costs and the data can also help build confidence that a new development will be viable
Remind organisations you are working with about the funding that they may be eligible for – the funding programmes offer loans to purchase land, to pay for the servicing, and to contribute to the build/construction costs
Highlight that private homebuilding can complement traditional market homes – offering more choice and potentially faster sales
This is one of many Briefing Notes that explain resourcing, planning, land, finance, demand, marketing, consumer support and various technical issues. To see the full range of guidance click here.
For the purposes of this Toolkit we have made the following definitions:
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This Briefing Note will be revised when the Regulations to support the commencement of the Self-build and Custom Housebuilding Act 2015 and the Government’s Right to Build policy are finalised.
Councils across the country are facing significant challenges to meet the growing demand for more housing at a price that local people can afford.
The Government’s Productivity Plan has made it clear that we have not been building enough homes to keep up with growing demand.
Ten major housebuilders currently build the majority of our new homes, and their business model is to construct homes at scale and for maximum profit.
The proportion of new homes built by small and medium sized (SME) housebuilders fell from two thirds in 1988, to just over one quarter in 2013, and the number of small building firms has halved since 2009.
Although our housebuilders collectively have capacity to construct more homes it is unlikely that they will be able to build enough to meet demand. It is therefore essential that councils proactively support other business models, including private homebuilding.
There is now clear evidence that the demand for private homebuilding is increasing and more landowners, investors, builders and developers are bringing forward projects. We also know from surveys by the Federation of Master Builders (FMB) and the National Home Building Council (NHBC) that most SME builders are supportive of this form of housing and see it as a business opportunity.
Some councils find it challenging to initiate their own projects if they have limited resources and land holdings, but they can still play an important leadership role in land assembly, and they can work with private sector partners to deliver plots to meet local demand.
Local builders, developers, housing associations and communities all have the potential to play a significant role in delivering private homebuilding opportunities. However they often need to be convinced that there is local demand and that the business model is workable.
This Briefing Note explains how councils can work with the private sector and other organisations to boost private homebuilding opportunities..
The Economic Case
All housing projects must have robust financial models, with minimal capital tied up and maximum sale certainty. In the UK most small builders and developers have traditionally only developed new homes by building them speculatively for sale on the open market. This means they have to forward-fund the purchase of the land, secure planning permission, pay for all the site infrastructure/servicing costs and the full build cost of the homes. Only after funding all this upfront are they able to sell the homes.
Due to the long lead-in times from the purchase of the land to the sale of the finished homes capital can be tied up for years before it can be recovered. This can put a strain on company balance sheets and makes debt financing challenging, particularly for smaller companies and new entrants. Consequently many SMEs find it difficult to fund more than one or two small projects at a time.
One of the benefits of providing private homebuilding opportunities is that smaller builders and developers can reduce their exposure to risk, because they contract with their buyers much earlier in the development cycle (typically when the plots are marketed).
With customers secured at the plot sale stage, the cost of the construction work can often be financed through the customer’s self build mortgage stage payments, rather than a builder’s normal development finance.
Thus the delivery of serviced plots (and then building out the homes on behalf of their self build customers) requires much less finance, and it can be more profitable.
Typical returns on speculative housing developments
The Mortgage Advice Bureau (MAB) published a report called ‘Mortgage Finance – the silent engine driving new build’ (MAB, April 2015) that explained the economic case for the custom build development model. The table below sets out the conventional profit margins a developer could hope to make on a normal speculative project. This shows that the gross margin is 20 per cent (this is the typical target), which, with the builder’s overheads deducted, produces an operating profit (or net margin) of 14 per cent. As capital employed is typically 60 per cent of turnover, the target Return On Capital Employed (ROCE) is about 23 per cent.
This approach to evaluating costs and returns is commonly used by builders to calculate the price they are willing to pay for land.
Potential returns on a custom built housing development
According to the MAB there are significant financial benefits if developers or small builders became custom build enablers. In this situation the builder/developer acts more as a contractor, carrying out the instructions to build to the plans agreed by the homeowner. In this scenario the materials, labour and land values are the same. However marketing and overhead costs are reduced and there are lower working capital requirements because the builder is paid as he builds out the homes.
MAB’s figures assume that the builder/developer requires only a quarter of the working capital that he would need for a speculative project. It points out that the proportion could be lower still, with no capital outlay required at all, where stage payments are made in advance for the new homes.
As a result the builder/developer requires a smaller operating profit to generate the same or higher ROCE.
Although it is important to note that every site and development will be different, the following worked example illustrates what a custom build development might achieve by way of returns. In this example the ROCE, a key measure of profitability, is 26.7 per cent against 23.3 per cent under the speculative model.
In this scenario the reduction in the builder/developer’s margin and the elimination of their marketing costs also reduces the all-in price of the property to 85 per cent. Assuming the market value of the finished home is the same as in the earlier example, the custom build homeowner will also secure a 15 per cent equity uplift.
MAB concludes that custom build offers some clear advantages over the traditional speculative model. It gives the homebuyer more control over the design of their home and, by reducing the builder’s costs, it can provide instant equity to the homeowner. This reduces risks for the lender if the homeowner needs or has a mortgage. The builder also benefits because it reduces the need for working capital and dependence on development finance. This reduces risk and makes it easier for smaller local builders to compete.
Explain the loans and grants that are available
Remind local builders and developers about the Government’s funding programmes – between them these offer loans to purchase land, to pay for the servicing, and towards the build/construction costs
Wider Benefits For Potential Partners
Encouraging landowners, smaller builders and developers to support private homebuilding has much to commend it.
Shared risk and reduced finance requirements
Landowners and custom build developers can choose to share their exposure. Landowners usually make their money when planning consent is secured but, through partnership agreements, payment can be deferred until individual plots are sold. In these circumstances a custom build developer will therefore only have to finance the road, and servicing, and attract the customers. They can also sell some, or all, of the plots with a design and build contract, which will generate further profits.
A range of funding sources are available to support landowners and builders that want to provide this form of housing (see Briefing Note Government loans and grants)
How do you do it?
The people who have made a big impact all say that it takes perseverance, and a lot of one-on-one time with the in-house team, reminding colleagues of the benefits of supporting more custom and self build homes. Some key pointers are: -
- Early ‘successes’ can be very powerful – consider facilitating a small pilot project, perhaps involving a few homes, to showcase what can be achieved. Where a pilot project provides a home for a young family that has been struggling for a long time this can be very effective. So, consider arranging for your colleagues to meet the young family so they can hear their story
- Spell our your commitment in your Vision document - include a clear heading in your Vision or Guiding Principles that identifies your proactive approach to supporting projects and customers. For example you could say you are committed to treating private homebuilders as valued clients, and you could then get this printed on posters and hang them up wherever they may be needed
- Consider using external experts to train staff in customer relations. If you are recruiting new staff consider appointing people who have the right mindset/philosophy from the start
- Arrange a study trip to see exemplar projects in Europe – there is nothing more powerful than taking your team to see some of the best initiatives in the Netherlands, Germany, Belgium or France. They will then appreciate the real impact that can be achieved if they treat private homebuilders as valued customers
Plan for culture change
This might mean allocating a budget to develop new skills, increased cross-team working, and recruiting new staff who have specific experience. It could also mean spending more time with your colleagues to explain the culture change you want to achieve and mentoring them so they adapt
Since private homebuilding projects are less risky builders and developers have the potential to finance more projects. On larger developments the inclusion of some serviced plots alongside more conventional market homes can also speed up the overall rate of sales – as the builder will be offering more choice to potential purchasers.
With private homebuilding developers could offer to build a ‘shell’ that a purchaser then fits out. This can make new housing more affordable.
More choice can mean faster sales
Remember that custom build can work well alongside traditional market homes – offering more choice and potentially faster sales
Larger customer pool
Most consumers don’t like the standard new homes that are on offer - one in four say they would not choose to buy a newly built home from one of the big housebuilders (for more information see ‘The Case For Space’ RIBA, 2011). This is because of a perceived lack of character, small room sizes and the limited storage space. UK homes are now seen as being among the smallest (and are the most expensive) in Europe.
Custom and self built homes address these concerns and offer a new way to directly ‘connect’ developers to consumers. Successive Ipsos MORI surveys undertaken over the last three years suggest that there are about six million households in the UK very keen to undertake a self or custom build project.
Councils that have already set up local Registers of demand, or have assessed demand through their Strategic Housing Market Assessments, are already reporting a lot of interest – with hundreds, or in some cases, thousands of people already on the Registers. Councils can help furnish builders/developers with information about these people, thereby reducing their marketing costs and their sales risk and helping to boost housing market absorption rates. People listed on a council Register could, for example, be directed to a local developer’s custom build opportunities. Or a council can, if it wishes, make information on the Register directly available to them.
Introduce people on your Register to local partners
Offer to provide information from your Register to local builders, developers or housing associations that are keen to provide private homebuilding opportunities
The inclusion of custom and self build housing on larger sites can help a builder or landowner improve the choice and diversity of the available opportunities for homeowners and assist in site marketing.
French Fields, near St Helens
This development of 19 detached custom build homes is on a 0.9ha derelict former industrial site near St Helens, Merseyside. Home manufacturer Potton, in association with mortgage broker Buildstore and landowner Mark Ward, is facilitating the project.
The landowner initially explored selling the site to a volume housebuilder, but he felt this would not deliver a reasonable profit. So he partnered with Potton, who financed an outline planning application to St. Helens Council for the demolition, land remediation and construction of a range of custom build homes of varying sizes.
Sample building footprints were used to illustrate the site’s potential capacity. These were based on local market demand considerations. Nearby residents supported the development. St Helens Council approved the project because it regenerated a long-standing vacant site, and because it would deliver much needed new homes.
Potton has a two-year exclusivity agreement with the landowner, and it has many potential customers looking for plots across the UK. A low cost loan from the Government’s Custom Build Serviced Plots Loan Fund has financed the cost of the infrastructure, roads and utility installations.
A simple Design Code has been produced and Potton is selling the plots with planning permission and all services in place. The average plot price is £150,000, and each plot is sold with a design and build contract to construct a home to the buyer’s specification. A completed four bed detached 150 sq m Potton home costs about £150,000.
The receipts from the plot sales are paid to the landowner – so across the entire development this will generate about £2-3m. Within a few months of launching the project more than half the plots were reserved. The purchasers include a range of local people – both by age and income.
Site servicing work began in the autumn of 2015 and most of the plots have been reserved. The first homes should be completed by the spring of 2016.
Shawsburn Village, Scotland
Developers and housebuilders can often work effectively with local landowners to help regenerate disused brownfield sites to enable local people who want to build their own homes.
This development provides 73 serviced plots. A local landowner initiated it on industrial land that had been used for mining related activities. The landowner worked closely with the local council and other statutory authorities to devise a solution that remediated the land, and provided good access and services so that the whole 5.7ha site could be used for new homes. A phased approach to site build out was agreed between the landowner, developer and the council.
The first phase of 25 plots was released in 2003 at offers above £30,000. More than 360 offers were received, and the average sale price was close to £33,000. The second phase of 50 plots were sold at offers in excess of £80,000.
The final phase has taken longer to sell, in part due to the higher asking price for the plots (prices from £150,000). The slowdown in sales was partly due to the onset of the economic downturn, and problems the landowner faced when his banking facilities were severely restricted. In the last year or so most of the remaining plots have been sold.
There was a simple Design Code prepared for the site as part of the planning permission that set basic requirements. These included maximum ridge heights, a 6m set back from the highway and 2m side spacing for homes on their boundaries. No caravans (or contractors vans parked in the roads) were allowed during the construction phase.
How Housing Associations Can Deliver Opportunities
Housing associations, co-operatives, charities and similar not-for-profit organisations potentially have a significant role to play in facilitating private homebuilding projects – especially collective schemes aimed at those on lower incomes.
Reduced Government grants, welfare reforms and forthcoming changes to affordable housing policy (for example ‘Starter Homes’ and extension to ‘Right to Buy') are all fundamentally changing the business model for housing associations. This is prompting them to diversify and become more receptive to new approaches to deliver housing. Housing associations are also more often in tune with the needs of people on lower incomes that are seeking to build a home for themselves.
In the rest of Europe housing associations routinely work with people on lower incomes, helping them to form themselves into a group, and sometimes assisting them during the design and construction phase. They are also good at devising schemes where more up market homes or plots are sold at a premium, to help subsidise homes for people on lower incomes – these are then available on a shared equity basis, for rent, or sometimes for outright ownership.
In Berlin the main thrust of the latest wave of ‘baugruppen’ projects is geared towards working with housing cooperatives or similar social housing providers, so that they can deliver affordable homes for groups of people that want to have a say in the design and layout of their properties. Many German groups come together and form themselves into an independent housing co-operative to facilitate their projects, often with support from other social housing providers.
Case studies on projects in Hamburg, Berlin, Tübingen, Freiburg, Amsterdam, Vienna, Zurich and Strasbourg are available in this toolkit – browse the Case Studies section for further information.
German housing associations also often partner with councils when public land is being released for private homebuilding. For example at Aschheim near Munich the local authority offers a package whereby it sells plots for terraced and semi-detached homes and works in partnership with a local affordable housing provider who constructs the properties. The homebuilders are offered a menu of fit out options. By keeping the plots small the council can facilitate spacious well-constructed energy efficient owner-occupied homes quickly, and at reduced prices.
In the UK about 20 housing associations have already delivered a range of affordable private homebuilding projects – many in conjunction with the Community Self Build Agency (CSBA).
Accord Housing has been involved in a number of private homebuilding projects. A good example is its project at Pensnett in the West Midlands. Here the CSBA co-ordinated a group of local people that were in housing need to help them to fit out 14 contractor built shells. On this project the private homebuilders did the plumbing, tiling, landscaping and other finishing. Some basic training was arranged via a local college. The homebuilders signed an agreement with Accord to work an agreed number of hours on site per week and to take responsibility for repairs and defects. In return each was allocated a home and provided with a credit to spend on fitting out the property. They were also granted an initial assured shorthold tenancy; this reverted to a standard assured tenancy after 12 months, once all obligations had been met. Accord’s experience of the project was positive, and it says the quality of the work and attention to detail was good.
Accord typically supports community groups by supplying land, in-house design, project management, and finance. It also has an off-site manufacturing capability. The organisation is developing a co-ownership form of mutual tenure that makes it easier for groups to finance self-build or self finish projects. It usually delivers affordable self-build schemes on land transferred at a discounted or zero value, and it has also used a ‘sweat equity’ development model to enable people to gain a share in the homes they build, up to a limit of 80 per cent.
This project in Walthamstow provided ten homes for rent. It was coordinated by Circle Housing with Waltham Forest’s housing team and the Community Self Build Agency – see our Case Study on Third Sector Private Homebuilding Projects
Cherwell District Council’s ‘Build!’ programme makes ‘shell finish’ homes available to local people on its housing register; the programme also provides opportunities for ‘self refurb’ homes when suitable properties become available. For further information please see our Case Study on Cherwell’s project at Newton Close, Bicester completed in 2015.
We have a detailed Case Study on the recently completed ‘self finish’ projects by the Orwell Housing Association – see Orwell Housing Association - Affordable Self-Finish
Housing associations are usually well versed in working with communities, liaising with tenants (or potential tenants), and they are familiar with the special challenges this can sometimes present. They can also play an important role in supporting group projects.
For example they can help a community group by providing advice and assistance with development appraisals, or they could offer to be a guarantor for any vacant or as yet unassigned homes in a group project to give lenders certainty. They are also well placed to help leverage development finance. For community led projects that aim to provide homes for rent they can also advise on tenant management and maintenance costs/regimes.
In Bristol, the Community Land Trust has received support from United Communities, a local housing association. Its first scheme – pictured here – is due for completion in 2016. Further information is available in our case study on Bristol CLT
Introduce people on your Register to local partners
Offer to provide information from your Register to local builders, developers or housing associations that are keen to provide private homebuilding opportunities
Experience has shown that housing association-led private homebuilding initiatives can help build community cohesion and deliver well-designed projects faster.
There are also longer-term benefits for the housing association. For example by supporting residents to build/own their homes it can help reduce void rates and maintenance bills. Housing association-led private homebuilding projects also often involve some construction training, which can open up opportunities to those that are unemployed.
On larger developer-led custom build developments social housing providers often play an important role by delivering the affordable housing element of the project.
Bostoen - Numerous Sites Across Belgium
Developers and housebuilders can offer private homebuilding opportunities as part of larger housing sites. This business model is widespread abroad.
Bostoen is a medium sized developer/housebuilder based just outside Ghent. The company routinely provides plots for private homebuilders on most of its developments. It currently has plots available on ten of its sites at prices from around €73,000 for a 230 sq m plot to €197,000 for a 650 sq m plot.
Purchasers can do their own thing, bringing in their own architect/builder, or select one of Bostoen’s 18 standard house types (prices range from about €129,000 to €325,000) and they can then specify the interior finishes. To help customers the company has built an impressive showroom that has different rooms presented in different styles/finishes.
Once the customer has selected the finish they want the company adjusts the price according to the specification selected.
Alternatively Bostoen can produce a one-off custom design (at a guaranteed fixed price) using one of the ten architects on its panel of approved designers. A common theme across nearly all its homes is that they are built to Passive Haus standards.
The company also works with cohousing groups, building a range of new homes to fit their requirements. At present it has four cohousing projects in the pipeline of between five and 26 units.
Erkheim, Southern Germany
Local kit home company Baufritz identified this strip of land in the small Bavarian town of Erkheim. The company had a number of potential customers looking to build locally and wanted to be able to easily facilitate plots for them.
The site forms part of the ‘Falchengraben’ development plan, and was designated for residential use by the council to help meet local demand for new housing. The land is subject to a legally binding, but flexible, Design Code (B-Plan) prepared and adopted by the council. The Design Code provides certainty about what the land can be developed for and preserves the ecology of the stream that runs through the area.
Baufritz bought the strip of former agricultural land from a local farmer for €30 per sq m, prior to the land being designated. The company then funded the infrastructure works to provide access and services for the nine building plots. The servicing cost €150,000 and it was procured using local contractors. The plots typically extend to about 1,000 sq m and have been sold at around €200 per sq m.
Marketing the plots was straight forward – site signage was erected in the middle of Erkheim showing a computer-generated image of a finished house. The company also exhibited at a local eco-building show. All the buyers were secured this way.
Baufritz reserved two of the larger plots to build a block of nine retirement apartments. The apartments will be a mixture of owner-occupied and homes for rent. The homes range in size from 50 to 108 sq m, and will cost between €148,000 and €316.000 (£148,000-£223,000). The total build cost is expected to be about €1.31m.
Baufritz took a similar approach on a site on the edge of Erkheim when it developed its ‘young village’ project (‘Das Junge Dorf’) on former agricultural land purchased from a local farmer for €30 sq m.
The 0.3ha site accommodates nine detached homes (each plot is just 360 sq m) arranged in a cul-de-sac. The company marketed the development by distributing leaflets locally, and offered a plot and construction package to build two types of home (a one bed home of 101 sq m and a three bed of 124 sq m).
Plots were sold at €100 per sq m (with a design and build contract to deliver the house) and all were sold to local people within six months. Customisation was limited to internal layout/finishes. Costs per home ranged between €170,000 to €195,000 (£120,000-£138,000) (1995 prices). This worked out about 25 per cent below market value, and the homes were cheaper than local terraced homes. A shared communal garden of about 160 sq m (managed by residents) is also provided.
Housing Associations can be key enablers
Recognise the important role that housing associations can play and explore opportunities with them
The following Case Studies offer useful insight into the issues discussed in this Briefing Note:
The NaCSBA Research & Development Programme is funded by the Nationwide Foundation and aims to promote the self-build and custom build sector as an affordable route into housing for a greater number of people in the UK.
For further information, please visit: