Aleem Khan, real estate partner at law firm, Boodle Hatfield, looks at the challenging conditions facing SME housebuilders, from financing to planning, and what needs to change to support the sector.

The mathematics are stark and sobering. Four decades ago, small and medium-sized (SME) developers delivered 40% of Britain’s new homes. Today, that figure has plummeted to just 10 – 12%. Yet as the government races towards its ambitious target of 1.5 million new homes by 2029, the very builders who could accelerate delivery find themselves caught in a perfect storm of financial constraints, regulatory complexity, and fierce competition from alternative investment vehicles.

The vicious cycle of the finance drought

Finance determines whether a site progresses from a plan to a reality. Today, SME developers face an exceptionally harsh funding market for two interconnected reasons.

First, the cost and availability of credit have shifted dramatically. The Bank of England’s sharp rate hikes in 2022-23, which saw the Bank Rate peak at 5.25%, have left a lasting impact. Even with subsequent reductions, current borrowing costs remain well above pre-pandemic norms, squeezing margins and rendering many smaller schemes unviable.

Second, lenders and investors have reallocated risk. Institutional capital has pivoted towards high-quality, income-stable assets like Build-to-Rent (BtR), co-living and retirement living. Market analysis from firms such as Knight Frank confirms these strong investment flows, which has left for-sale SME projects competing for a shrinking and more expensive pool of capital. Industry surveys underscore this reality: around 60% of SME developers report that securing development finance is a significant barrier to delivery – a constraint that has worsened considerably since 2021.

Planning: The ultimate choke point

Even when finance is secured, the planning system can kill a viable scheme. SMEs typically operate on small brownfield and infill plots, which attract a disproportionate level of regulatory complexity. Navigating demands for biodiversity net gain, water neutrality and nutrient mitigation can incur six-figure consultancy and legal fees on small projects, eroding viability before a spade ever hits the ground. The introduction of a ‘medium site’ category for 10 – 49 homes and the delegation of approvals for sites under 9 units to planning officers are welcome steps, but more is needed.

To make matters worse, planning approvals are in sharp decline. Recent data shows that detailed planning permissions for new homes in England have fallen to their lowest levels in over a decade. For an SME reliant on bridging finance, the slow decision-making of under-resourced local planning authorities (LPAs) transforms modest delays into existential threats.

Why SMEs are crucial for housing delivery

SMEs are the specialists who deliver the characterful, locally-focused schemes of 10 – 100 units that volume housebuilders often avoid. They are vital to local economies, employing regional labour, training apprentices and sustaining local supply chains. Historically, SMEs built approximately 40% of the UK’s new homes; today, that figure is closer to 10 – 12%. This is paired with an estimated 85% decline in the number of small building firms compared to a generation ago. This loss is not trivial – it has hollowed out the UK’s flexible delivery capacity and concentrated housing supply in the hands of fewer, larger companies.

Adapting to the ‘Living Sector’ opportunity

Not all capital is fleeing the residential market. Instead, institutional investors are repricing risk in favour of long-term income and scale within the so-called ‘living sector’ – encompassing BtR, retirement living, co-living and single-family rentals. These sub-sectors offer durable returns and can create new routes to liquidity for SMEs through joint ventures, forward funding, and blended equity-debt structures. The message is clear: SMEs must adapt to a more diverse market, and policy must support this evolution.

Time for coordinated action

There is no single silver bullet. Meaningful change requires pragmatic, targeted reforms across three key areas:

• Finance: De-risk and Incentivise – The government should expand targeted guarantees for SME development loans and direct a proportion of high-street commercial real estate lending to smaller developers. Public guarantees and tax-efficient vehicles can lower the effective cost of capital and attract pension fund investment into this vital sector.
• Planning: Simplify and Resource – a genuine fast-track process is needed for sub-50-unit schemes, featuring digital submission, statutory deadlines and ‘permission-in-principle’ options. We also need to get real about resourcing; a concerted effort to recruit and retain planners within LPAs is essential and could be funded by a higher application fee for major developments.
• Land: Carve Out SME-Sized Plots – public bodies should be mandated to parcel up and market serviced, small plots on deferred terms. This approach reduces the upfront capital SMEs need and would break the stranglehold of the major housebuilders and land promoters on the supply chain, creating a more competitive and dynamic market.

Reviving SME housebuilding is not an act of nostalgia, it is a practical strategy to deliver more homes, more quickly, in a way that benefits local communities. Capital will always follow investable, de-risked projects. However, this will only happen if Whitehall fixes planning resourcing and land allocation, while the City embraces a suite of public-private tools to make SME projects bankable again. This goal is achievable, but it demands coordinated policy and a genuine commitment from both the government and institutional capital to change the game.

Source: Showhouse