Self build’s new home in the mainstream
The self build sector continues to make headway in offering solutions to the housing market. Raymond Connor, chief executive of BuildStore Financial Services, reveals the latest developments which have government backing and offer a wealth of opportunities for mortgage lenders
The troubles of the UK housing market are well-documented, but recently, there has been a shift in emphasis to reverse this misfortune. Now, with significant political will, the focus is on finding solutions and creating new opportunities to strengthen the housing sector, especially with regard to the supply of new homes. The individual and custom build sector is now part of the government’s new strategy to bring long-term stability to the housing market.
The self build housing sector first came to prominence in early 2011, when the government picked up on its potential and recognised the role it could play as part of its localism agenda. One year on, and the government is now committed to doubling the size of the market over the next decade.
As new government reforms and policies are implemented, there is now a greater likelihood that the self build sector will grow and become a mainstream contributor to the housing market.
The latest Datamonitor UK Mortgage Map predicts total mortgage lending in 2012 will reach just £127 billion, and by 2015 will still only be at 2001/02 levels. However, it does highlight opportunities for lenders to invest in new growth areas of lending and benefit from government plans through innovation to grow the housebuilding sector.
The self build lending sector is hailed by Datamonitor as ‘one to watch’ and is expected to be one of the best performers in the mortgage market over the next five years. As well as doubling in size over the next three years to reach annual gross lending of £1.9 billion by 2015, the self build finance sector is also predicted to take share from the overall mortgage market.
Encouraging this growth are the measures which have already been announced, including the introduction of the Community Rights to Build and to Reclaim Land, through the Localism Act; the release of public-sector land for up to 100,000 new homes to include provisions for self build, and the New Homes Bonus scheme to incentivise local authorities to enable and deliver more new homes.
Furthermore, within the latest draft of the National Planning Policy Framework, the housing minister Grant Shapps has proposed that local authorities are obligated to address the demand for self build housing in their area.
With its intrinsic link to the wider economy and social well-being, the government has stepped up its efforts to rescue the housing market, detailed in its Housing Strategy paper, ‘Laying the Foundations’ which was published in November 2011.
A key focus within the paper is the strategic reform of the way in which new housing is planned and delivered. This includes increasing support for self build and locally planned large-scale housing developments (referred to as ‘Custom Home Building’).
Perhaps the biggest opportunity and potential now lies in Custom Build projects, where the principles of the self procurement model are used to create enabled self build developments on a large scale, to provide volume housing solutions to local communities and allow local residents to be more involved in the design and procurement of their own homes.
It has always been challenging for self builders to find land to build on; principally, there has been a lack of affordable and suitable individual building plots to meet the demand - currently around 80,000 people are signed up to land-finding database PlotSearch.
Breaking away from the profit-driven developer model, and the traditional ‘sweat-equity’ model of community housing, the modern Custom Build option removes the land barrier and is principally designed to increase the opportunities for self build housing in the private homeowner market. It provides more build-ready plots for self builders at more affordable prices, which also allows them to retain more equity in their new home.
Under the proposed obligations, local authorities and other government bodies, including the Homes and Communities Agency (HCA), can release large plots of land for self-procured housing for Custom Build developments. This means that councils can benefit from the New Homes Bonus scheme, local construction industries are given a boost, and lenders can play a role in funding new housing in their local communities.
A number of Custom Build schemes, with the potential to provide thousands of new self build homes, are already in contemplation across the country, with some schemes expected to break ground later this year.
The HCA has included self build as part of its land disposal strategy, offering individual self build opportunities and teaming up with partners to create self build schemes where there is a local demand and appetite amongst communities and local authorities. So far, six HCA sites - in Derbyshire, Bristol, Surrey, Stoke, Hemel Hempstead and Milton Keynes - have been released as trial development sites, offering self build plots.
A pilot Custom Build scheme in Swindon has just had approval from council members, and offers 12 self build plots, with the potential for a further 13 to follow at a later date. The scheme is a joint initiative with BuildStore and will be the first scheme of its kind to offer self build plots and options for assisted self build. It represents a prime example of how the self build model can be used to boost housing supply.
Roderick Bluh, leader of Swindon Borough Council, commented: “The self build scheme is an exciting concept and reflects our commitment to providing quality homes that are more affordable for local people. Self build housing is a great way for us to ensure that the people of Swindon get the homes that they want and need. As the first council in the UK to offer this type of development, we are confident that this is a model that will soon be seen up and down the country.”
Custom Build is also being used as an attraction for urban developments. For example, in Stoke, self build housing is being promoted as part of a significant regeneration scheme to bring ‘wealth creators’ to the area. Two pilot sites – one owned by Stoke City Council, and the other by the HCA - have been identified, and will provide up to 40 plots, for self builders to design and build modern prestigious homes.
As well as providing a solution for private housing, Custom Build schemes are also being used to offer affordable and intermediate forms of housing. Cherwell District Council in Oxfordshire is developing a district-wide self build programme called Build!® across a number of sites and using a range of models. BuildStore is supporting the council in looking at mortgage opportunities for self builders who want to build an affordable home of their own through Build!®.
Councillor Debbie Pickford, cabinet member and portfolio holder for housing for the council, commented: “Cherwell is developing a range of self build housing options to help local people access decent and affordable housing. We have already had a lot of local interest and are working extremely hard to make self build an option for more people.”
With self procurement continuing to offer solutions to an otherwise struggling housebuilding sector, mortgage lenders have a significant opportunity to enter and support the sector. The need to mitigate and manage risk is understandably a key issue for lenders entering the market, and in order to provide meaningful funding solutions for self builders, this issue must be addressed.
BuildStore’s risk management process is delivered in two stages - pre-build phase and construction phase - whereby each project is individually assessed, verified, monitored and supported from the earliest stage, and throughout the project, to ensure any issues are identified and dealt with as soon as possible.
The pre-build process involves a detailed evaluation of the costings against the plans, taking into account the proposed schedule. The construction phase process is conducted by qualified, authorised inspectors, to ensure compliance with building regulations. The customer’s progress and attitude to the build is also monitored regularly, and expert assistance is available if any issues start to arise.
BuildStore, in association with insurer, Jubilee, also offers mortgage indemnity products which work to minimise risk and loss in two distinct ways.
Firstly, BuildStore’s MIG allows lenders to indemnify their lending on land or project purchase costs and building costs, allowing them to lend higher percentages or release the funds earlier, providing a better cash flow for the borrower.
Secondly, on the rare occasion a lender takes repossession of a partially-built property, a Build Out Cover policy reduces the risk of loss, providing full cover against the additional costs to the lender in completing the property prior to sale, including project management fees, and the borrower’s remaining input. This allows the property to achieve its maximum value, with no loss to the lender or borrower.
The self build market is gaining momentum, assisted and supported by the UK government, and local government, and the traditional difficulties often associated with lending in the self build sector are being eradicated, including its reputation as ‘niche’ and more risky.
There is plenty of scope for mortgage lenders to take advantage of the opportunities and benefits in self build lending, where the new models are emerging, and demand is increasing. Mortgage lending can benefit from quality profitable lending, and the growing self build sector represents a prime investment opportunity for lenders.
Case study of a self build
For some first-time buyers, such as Katie and Darran Macdonald, self-build brings a proper home within their budget. The couple originally started house-hunting a few years ago in Oxfordshire, where they were living at the time.
Katie, 33, a local authority personal assistant, says: “Prices were astronomical and there was no way we could afford the kind of spacious home we wanted.”
Darran, 31, is a carpenter with experience on construction projects and was keen to have a go at building his own house. Katie adds: “I didn’t take much convincing that that was the way to go.”
Decision made, the couple set about researching their project to learn about the process of self building and all the options they needed to consider, including how they were going to fund the project. Katie and Darran turned to BuildStore to get the advice and solution they needed.
Katie says: “As we had no property to sell, and just a small amount of savings, we went for the Accelerator mortgage, which worked really well, and managing the financial side of the build was very easy. We knew exactly how much money we were going to get and when we were going to get it - it helped everything go smoothly.”
With their finances in place, the couple’s search for land could really begin. It took them about a year, but eventually they found a ¼ acre plot which was once the garden of a Grade II listed building in the centre of Wem, a market town in the north of Shropshire, close to Katie's family. She says: “We really liked the plot, and it came with planning permission to build a three-bedroom bungalow.”
The couple started on site in June 2009 and the project has been a genuine self-build. Apart from using contractors to lay foundations, do internal plastering and some roofing, they have done all the work themselves at weekends and during time off.
Katie says that any project like this is an emotional journey: “There is an amazing feeling when a bit of wood suddenly transforms into part of your home - all the hard work and sacrifices we’ve made has been worth it.”
The couple are just putting the finishing touches to their home, but already, financially, the project is a winner. The whole construction has been funded by an advanced stage payment self-build mortgage through Buildstore Financial Services. The plot cost Katie and Darran £125,000, financed from a self-build loan of £240,000 and some savings. By doing the vast bulk of work themselves, the couple have managed to keep total costs on budget at just under £250,000. The completed house is worth just over £330,000 and so the couple already has £80,000 in equity in their new home.