Small is beautiful, housing ministers have been saying this year. Not small houses, or diminutive citizens, but instead small and medium size builders.
It’s a sector that was heavily battered by the consequences of the financial crisis post-2008 and largely overlooked as the government gunned for high-density, big builders with the ability to ramp up construction to achieve the 300,000 homes a year hoped for by the mid-2020s.
But in its rush to press every button on the housing console, the government has come to appreciate SME builders once again.
In September housing minister James Brokenshire announced a £1 billion fund in partnership with Barclays to help back more SME developers; in July new planning rules were published that encouraged the development of smaller sites and more recently £450 million was earmarked to help release public sector sites for SMEs to develop.
But while giving with one hand, the government has been taking away with another.
Because although the extra funding and opportunities are there, as far as Mani Khiroya, MD and founder of London boutique developer Fruition can tell, the market for his kind of properties has endured death by a ‘thousand cuts’.
Fruition has been around since 2004, four years before Lehman Brothers imploded, and has so far built approximately 227 units including both newbuild houses and apartment as well as upmarket conversions, and has a further 325 homes within its development pipeline.
It operates within the mid-prime market, selling homes with an average PSF of £800 and in the past has focussed on central areas of north and west London, occasionally straying south of the river and also into the ‘burbs.
“The market has been difficult since the Stamp Duty change in 2014 and really that was the top of the market for us,” he says. Since then, he explains, a continuing series of small tax, regulatory and economic changes within the UK have slowly reduced liquidity in the market.
One of the cuts that has particularly annoyed Mani is the change to the ‘non-dom’ rules introduced last year.
“The Tories have always been pro-business but I think some of their decision making has been much more political; the rules change for non-doms is not going to deliver more affordable homes in London, for example.”
“I see it as paying lip service to issues to win votes.”
“It’s hard to say despite whatever anyone says to guess whether Brexit will be good or bad for the UK however it ends up but I feel that ultimately people have to move home and transact and there comes a point when they won’t wait any longer. So I think as long as we get to a point where there is more certainty rather than very little – as we have at the moment – I believe at that point the property market may start to revive as people will move forward again,” says Mani.
For Fruition, such changes have had direct consequences. “The deal flow has been problematical, which makes it very difficult to understand how to price properties,” he says.
“That means you don’t know whether an offer is a good or bad one when it comes in, and if agents are advising that an offer is bad, which at the time they think it is, for me it also feels like you’re chasing the market down.”
Referring back to the bad days of the financial crisis, Mani sounds almost misty eyed about the recession that followed.
Then, because it was obvious that the market had ‘dropped off a cliff’ at the time, developers reacted pro-actively with price cuts of 25% below market value to transact. Now, he argues, it’s been a slow dribble down over the past three years or so, making pricing tricky.
“We have a development where homes were selling for £2.5m two years ago – but now we’re closing sales with price drops of around 20%.”
Faced by these difficulties, and with Brexit looming, Fruition has been employing several survive and thrive strategies.
In the years after the financial crisis it withdrew from its then suburban building programme and followed others in the ‘flight to safety’ into central London.
“Our investors wanted to be in better postcodes and were reassured by good areas that they understood and knew well,” says Mani.
But Fruition has subsequently been working hard to persuade its clients that London’s regeneration hotspots are where their money will enjoy the highest growth.
Mani says his company has now pivoted to concentrate on these areas, in particular the Old Kent Road Action Area in and around Bermondsey and the 650 acre redevelopment of Old Oak and Park Oak in West London.
“These kinds of areas offer more affordable land, easier permission because local planners have a remit to deliver homes and better densities,” he says.
Another opportunity Mani has chased is to look skywards. The company has now been completing rooftop developments for nearly four years, usually on the top floors of commercial buildings including pubs and restaurants.
Air rights, as the building of structures on existing roofs is best known, is gaining momentum.
The government is backing it, announcing in July that it wants to see planners allow ‘upward extensions where the development would be consistent with the prevailing height and form of neighbouring properties and the overall street scene’.
Mani says sky rights solve several challenges in London’s crowded streets.
“In high density areas or well-established ones there’s always been a push-back from residents; whether it’s new-builds or basement extensions, they annoy local people,” he says.
“It’s been all about coming up with a strategy to find new opportunities to cause the minimum disruption where there’s a win-win with the local people and the tenants in the building. It was obvious there was so much opportunity; drive down any street in London and you will see gaps in the streetscape.”
Air rights is all about ‘who dares wins’ too. A lot of developers are put off getting involved because it requires more effort, collaboration with the freeholder and/or tenants and sometimes requires a joint venture which builders then can’t fully control.
Mani says going into a partnership with freeholders delivers new homes for the capital, new projects for Fruition and often investment in a building’s externals and communal areas in return for cooperation. The locals like it too, because a building gets a facelift and helps improve the local street scene.
And yet Fruition faces several other challenges. Like all developers Mani verbally rolls his eyeballs when planning is mentioned.
He says Southwark are proving ideal at the company’s latest development in Bermondsey, and Fruition are planning more projects in the area.
But in the past, he says, the months it takes to get a project off the ground even when it’s been recommended by local planners is ‘a major handicap’.
“In our experience in under-resourced boroughs, it could take eight to nine months to win planning on a relatively uncontentious site, even if we have recommendation for approval relatively early on in the process. That’s pretty outrageous when it’s supposed to take between eight and thirteen weeks,” he says.
“When you’re a small SME and paying interest on a site, it’s quite debilitating when you’re trying to deliver profits for investors and partners.
I don’t think there’s any understanding; everyone just paints developers as the big bad wolf making loads of profit; and that’s just not the reality of the world.”
Hopefully the government’s decision to embrace small and medium size developers will both deliver easier planning decisions, and make small even more beautiful once more.