Contractors pay

Are developers and local authorities now in competition?

Theresa May’s removal of the local authority borrowing cap during this year’s party conference was a cause for concern among property developers.

In many ways it was a pragmatic step – one many described as long overdue. In theory it serves to diversify the housing market, stimulate industry capacity and help councils meet their affordable home requirements.

However, it also put local authorities into direct competition with small and regional developers, potentially causing a profound restructuring of the construction industry.

Councils are now able to potentially bid for development sites at the expense of local developers.

Authority advantage

Many authorities have already set up their own development companies. These are either standalones or joint ventures with recognised developers, who bring to the table a wealth of experience in marketing, styling and quality. These partnerships are important – local authorities won’t chase large-scale projects until they have gained the confidence and manpower to deliver.

In approaching development work, local authorities have a number of advantages over small and regional developers. They enjoy access to cheaper funding, as they are able to borrow from the government at very low rates. And because they can also borrow for longer periods of time, they can adopt longer-term building strategies.

Historically, funds had to be used by a specific date (often not very far in the future), which tended to prohibit financing larger developments this way, given the time it usually takes to see a large development through to completion.

However, the revised funding available to local authorities can now be drawn down over a much longer period of time. In fact, local authorities have been buying up investment property using government funding, extended at these low rates, to secure an investment yield to provide surplus income. It’s these same funding conditions that are available for development.

In addition, local authorities are better able to meet affordable housing targets, whether on the same site or on another site, as changes in the rules over compulsory purchase will speed up delivery timelines and improve viability. As council-run development companies are not profit-driven, they are able to maintain a greater focus on delivering both the housing types and numbers required.

The advantages council-run businesses have may allow them to experiment with new techniques, such as modular construction. This approach removes weather from consideration, and brings factory-style efficiency and better quality control into the production process.

Many larger construction firms already use modular production, but the industry would benefit from more development firms employing it.

What now for SMEs

Overall, local authorities have a better hand to play with following the borrowing cap’s removal.

The larger developers, with their enormous technical resources, manpower and brand value, will undoubtedly look to cover their positions by working with local authorities. Smaller builders, however, cannot always offer the same advantages.

All is by no means lost for the smaller players. One option is to move away from generic housing to more specialist markets such as retirement living, student accommodation, buy-to-rent and micro-accommodation.

In the future we could see a more diversified construction trade with a much more prominent role for the local authorities, while smaller firms place bets on specialised methods of construction and manufacture.

Source: Construction News

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