Are self-build and custom-build the new Buy to Let?

Mon 18th June 2018

Are self-build and custom-build the new Buy to Let?

The number of new homes being built in the UK has been stuck at woefully low levels for years, if not decades. In the period immediately after the second world war and right through to the 1970’s, the UK managed to build at least 300,000 new homes a year. Building levels then started to reduce, and in the last decade, we have built barely half that number despite demand being higher than ever. This imbalance of supply and demand has caused unintended consequences, not least the strong property price growth that we have seen in many areas.

However, over the last year or so the need to build more homes has risen rapidly up the political agenda, and there now appears to be a renewed political will to deliver significant increases in new build property. This has come (probably as no accident) simultaneously with reducing popularity for buy-to-let borrowing, brought about through a series of well-publicised measures.

The reasons behind the need for more housing are well-known and include rising population numbers; a trend towards smaller households; a need to increase capacity in areas of employment; and higher demand. Taking just one of these, the trend towards smaller households, government figures suggest that there will be a 25 per cent increase in the number of single households in the next quarter of a century, which would create a need for almost two million more homes, just to stand still.

In January 2018, a new national housing agency, Homes England was launched, with a mandate to increase the number of new homes being built to 300,000 a year by the mid 2020’s. To do this, it will have a clear focus on removing obstacles and increasing growth across a variety of different areas, including better coordination on planning rules, the redevelopment of brownfield sites, and an increased focus on self-build and particularly on custom-build.

If self-build is what we all enjoy watching Kevin McCloud presenting programmes about, then what is custom-build? Is it just another name for the same thing? No, but it is easy to see why the two get confused. In some ways, it is easier to say what custom-build is not. It is not someone who buys a single, one-off plot, maybe split off from a garden, and who then commissions an architect and builders and creates a completely one-off property. Rather, it is an operation which is part of a wider plan. At one end of the spectrum it can be a larger site split into smaller plots and with some minor collaboration between neighbours but with a real self-build feel to it, and at the other end of the spectrum it can be much more similar to buying a house on a development from a builder, but with a greater level of ability to influence the final fit-out of the property. Custom-build really is a broad concept.

Most mortgage intermediaries by now have gained experience of obtaining finance for new build property; many will have obtained mortgages linked to the government’s Help to Buy scheme, and some will also have familiarity with the concept of shared ownership. However, these are at the more straight-forward end of the spectrum; in each of these instances, finance is being obtained for property which is already built (or will be by the time the mortgage draws-down).

Intermediaries may not, however, have had any exposure to self-build or custom build, as this is still a much smaller market, and one which the average client will not be involved with. Programmes such as Grand Designs have done much to raise the appeal of building your own home, but for most people, it remains more a fantasy than a likely option. For many people, it is simply far too daunting.

Things may be changing though. The greater co-ordination of government policy is coming at a time when there is also an increase in interest in the personalisation of new build property. It is also helped by the explosive expansion of energy-efficient concepts and products. The increasing awareness of the fragility of our planet is only likely to drive a desire to adopt the best that technology can provide, and self-build provides the perfect platform for this. The developments built by large-scale builders will continue to be the main market, but the more bespoke end of the market will be an increasingly important sector.

A desire to undertake a self-build is all very well, but unless the finance is there to support it, it will remain a very niche market. The good news though is that in the last few years, mortgage lenders involved in this sector have increased in number, and have also developed better processes, products and capability to deal with these types of applications. The lending process is still different, but it is more integrated than ever before.

At Furness, we see the self-build and custom-build markets as not only here to stay, but likely to become a significantly larger part of our overall lending over the next few years. If you are looking for the next significant area of the market to develop, and want to get ahead of your competitors, then I believe that you would be well-served by considering the self-build and custom-build market.

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