Join the self build revolution
Raymond Connor of BuildStore Financial Services explains how the self build housing market, with new-found political support, is poised to become mainstream, and why lenders need to act now to benefit from high quality, low-risk lending in this sector.
Source: Mortgage Finance Gazette – 6th January 2011
Against the backdrop of a credit crunch, a recession, and a new government, the mortgage and housing markets have changed for good. With their weaknesses exposed, it is now time to consider the potential for new models of housing procurement, and the funding thereof. The so-called ‘good times’ of the late 1990s to mid-2000s will never come back. And yet, they are still being used as a gauge for current progress, creating an unrealistic picture of the market going forward.
Research by Datamonitor shows gross residential mortgage lending for 2010 is below £145 billion, and will struggle to reach levels of activity seen in 2008 by 2014.
House prices are now around 10 per cent lower than their pre-credit-crunch highs, and speculative volume housebuilding produced only enough homes for a third of the new households formed in 2009/10.
Furthermore, tens of thousands of potential house buyers remain trapped by negative equity, or are unable to qualify for a new mortgage to move house.
These issues, along with severe budget cuts in social and council housing, have left a gap between housing supply and demand, and therefore, the need for an additional robust housing procurement model is even more apparent.
The relatively new coalition government is currently considering its housing policy response, much of which will be revealed in its Localism Bill.
Following several announcements by housing minister, Grant Shapps, it is now clear that part of the response will include a role for the self build, or self procurement model, a sector they see as ‘coming of age’.
Self build housing
The self build model is a well established contributor to the country’s housing stock, going back to the 1920s, and provides better quality homes that meet people’s requirements and suit their individual lifestyles.
The concept and definition of self build is broad; each project is different and the level of engagement in the project varies. Whilst for some, the term ‘self build’ indicates that people physically build the house themselves, the self build model typically involves purchasing a plot, managing the build, and appointing tradesmen and professionals to carry out the construction phase.
Estimates show that the number of UK self builds rose from around 2,000 in the late 1970s, to around 17,000 in 2007. It was during this period of growth that it was labelled as ‘self build’.
The aspirant market for self procured homes is believed to be as high as 100,000 units per annum. The self build model, including major renovations, is highly adaptable to deliver quality housing that meets individual needs and circumstances, whether its design and build from scratch, bringing empty homes back into use, or retro-fitting existing homes with the latest eco products and technology.
In its position as the leading intermediary in the self build sector, BuildStore has been continuously working to develop the lending market over the last ten years. It has established infrastructure and systems to deal with customers and monitor each project, and working with lenders, has developed specialist products that are both practical for borrowers, and offer profitable margins for lenders.
Despite the benefits, lenders often shy away from the self build lending market. Principally this stems from a lack of experience, and systems issues in dealing with stage payments.
This has resulted in a severe lack of funding, which has hampered the market, and the current demand for self build finance still remains largely unfulfilled – only one in four prospective self builders are able to secure the funds they need. By virtue of the political, social and economic conditions, demand for self build funding is expected to grow, so lenders need to respond.
The current climate has created a unique opportunity for the self build sector, especially at a time when other housing procurement routes are not delivering the output needed.
Factors such as increased availability of land for sale, a drop in land prices, and the lower cost of labour have made self build more appealing and accessible, and for many people, self building is the only way to get the home they want at a price they can afford.
As an alternative housing procurement model, self build has been gaining mainstream recognition, most notably, politically. Ahead of the publication of the Localism Bill, housing minister Grant Shapps has already announced the Community Right to Build (CRtB) Scheme:
“Anyone who wants to build their own home, or collaborate with their local community to build a new neighbourhood, should be able to do so. We fully recognise the contribution the self build sector makes towards delivering the housing this country so urgently needs and its potential for providing more homes. We are interested in new ideas and exploring all possible ways in which the self build sector might be able to deliver homes as part of our localism agenda.”
The CRtB scheme will devolve power to communities, to take forward developments for new housing and facilities in their area. BuildStore is currently in consultation with the Department of Communities & Local Government (DCLG) on its policy response to support self build housing, and the whole self build supply chain, including mortgage lending.
Self build finance is one of the few sectors that will grow significantly in the next few years, according to Datamonitor. In its report, “UK Mortgage Market Map 2010”, Datamonitor identifies self build mortgages as one of the strongest performers, predicting a rapid recovery.
Datamonitor predicts a compound annual growth rate (CAGR) of 20.5 per cent between 2010 and 2014, resulting in gross lending of £3.4 billion in 2014 (for standard mortgages, Datamonitor predicts a CAGR of 14 per cent between 2010 and 2014.)
Lenders need to respond to the self build market, and address the need for more meaningful, customer-friendly products in order to serve the sector appropriately.
There are social, political, economic and commercial benefits to lending in an expanded self build sector, and working with specialist intermediaries, such as BuildStore, lenders can make the most of these benefits.
As well as creating homes in places that people want to live, and allowing communities to grow organically, self build and renovation also helps to maintain jobs, and contributes billions to the UK’s economy each year.
Increasing gross lending, and developing products for such new models of procurement will allow more people to remain in their communities, deliver higher quality, more energy-efficient homes, create tens of thousands of constructions jobs, and increase spend on building materials and products.
Furthermore, full status lending in self build behaves as well as or better, than prime lending. Lenders can provide funding for experienced borrowers with an average loan to value of 59 per cent, and can benefit from an unrivalled quality of low-risk, low arrears lending.
Lenders want high-quality, low-risk business, and need profitable margins, and self build can deliver this. With typical interest rates on self build products at around 6 per cent, the self builder is an attractive prospective customer.
Perception of risk
The key issue for the lenders entering a more significant self build lending market is their perceived exposure to risk. In reality, this risk is relatively low; over the last twelve years and over 15,000 building projects, only 46 have been notified to BuildStore’s Mortgage Indemnity Guarantee insurer as having been repossessed. As expected, the majority of these have been as a result of the recession.
BuildStore recognises that lenders should benefit from the same level of protection on self build lending, as any other new build development, and to reflect the sector’s mainstream position, has developed additional levels of cover to protect lenders, by managing risk.
The risk management process should apply to both the pre-build and construction phases.
The pre-build process should involve a detailed review of the costings against the plans, taking into account the timescales proposed. The construction phase process should be policed by qualified, authorised inspectors, to ensure compliance with Building Regulations.
The customer’s behaviour and attitude to the build should also be monitored to ensure matters are progressing to plan. All of these processes are included in BuildStore’s Service Partnership with lenders.
Mortgage Indemnity cover
In addition, BuildStore, in association with Jubilee Insurance, has developed Mortgage Indemnity products to lessen the risk of loss.
Firstly, a new MIG cover for the traditional arrears style of self build lending. Lenders will be able to indemnify their lending on land and building costs – from 70 per cent to 90 per cent in the case of land value, and from 70 per cent to 90 per cent in respect of loan-to-build costs at each stage. This will, in effect, enable lenders to provide the cashflow required by their customers, but from a protected position.
One of the most often quoted concerns for lenders is the risk of being “left with a half-built house to sell”. Whilst repossession rates are incredibly low, BuildStore has also developed Build Out cover, again with Jubilee insurance.
Effectively, in the event of possession, this policy will (subject to indemnity levels) cover fees to establish a build-out plan, including the project management fees to completion, and will also cover the borrower’s remaining input to the project.
This will allow the lender to continue to fund the build to completion, thus realising the full inherent value of the property. With a maximum end loan-to-value of 75 per cent, there will in most cases be an adequate buffer to ensure that no loss is sustained by the lender.
The process administration will be carried out by BuildStore Financial Services in conjunction with the lender’s recovery department. Over the next five years, the importance of housing procurement using the self build and renovation model, where the end occupier is more involved in the design and construction of the house, will become apparent.
Lenders need to act now, to take advantage of the opportunities and benefits from self build lending, where the exposure to risk has been significantly limited. The mortgage industry needs better quality business, and the growing self build sector needs better mortgage lending.
Raymond Connor is chief executive of self build finance specialists, BuildStore Financial Services.
For information on BuildStore’s upcoming lenders’ conference, or to receive a copy of its new report – ‘The Case for Enabled Self Build’ – which explores the future of the self build lending market, contact Jaclyn Thorburn on firstname.lastname@example.org
Build-Zone are a major provider of 10 year structural warranty, technical audits, and building control services, to the self build marketplace.
Build-Zone Director Simon Middleton said:
“This is really is a positive step forward for anyone who has dreamed of building their own home but have had their hopes dashed through a complex planning system and lack of land in their community. Build-Zone has been providing Structural Warranties to this [Self-build] market sector since 2003 and we already have the products in place to provide essential cover on community projects as well.
Our sister operation Self Build Zone is the market leader in the provision of Self-build insurance and is also in the perfect position to provide communities looking to build homes with specific site cover as well. Insuring the project properly is of fundamental importance when there are many people’s financial interests at stake”.
Self-Build Zone products include:
Self Build Zone Director, Simon Middleton will be guest speaking at the Lending Policy Meets Housebuilding Reality Conference where he will deliver a warranty providers view of Modern Methods of Construction and Eco Building.
The website can be found at www.buildzone.com
Or subscribe to the structural warranty blog: www.structural-warranty-blog.co.uk