Time to think small if the government is serious about solving the UK's housing crisis

 
Katherine Denham
Average House Price In The UK Rises 8% In The Year
The government has no hope of hitting its ambitious housebuilding targets unless it encourages a new generation of entrepreneurs in this sector (Source: Getty)

You can forget trying to unravel our tangled planning regime. Forget improving access to land. And forget trying to ease the squeeze on skilled construction workers.


The government shouldn’t bother with any of the above if it won’t do more to help homebuilders secure funding to get projects off the ground in the first place.

This is a funding void that has drastically shrunk the number of small housebuilders in the UK.

In fact, if you hark to 1988 – which was the most productive housebuilding period in British history – there were 12,200 small builders in the UK. By 2014 (the latest figure available), the number dropped to 2,400, which is a decline of 80 per cent.

And when you look at the largest 10 housebuilders in the country, not a single one was founded after 1990.


Of course, the dire lack of housebuilders only serves to exacerbate the country’s supply crisis.

“Solving the nation’s housing crisis is as complex as it is urgent.” Those are the words of the UK’s former housing minister Mark Prisk in a yet unpublished report from LendInvest called Putting Finance First.

While Prisk says we can’t point blame for our dysfunctional housing market in one direction, it’s clear that finance is a major prong in this multifaceted problem.

Lack of funds is certainly a huge stumbling block for smaller players in the property market.

SME housebuilders, of course, can help develop affordable homes – whether that’s through mixed method property, modular homes, or fully-customisable residencies, says Jon Hall, managing director at challenger bank Masthaven.

“These small to medium sized businesses could well mark a turning point, if not the answer, to the UK’s housing woes,” he adds.

But more than half of small builders say the major hurdle is getting enough money together to get projects rolling, according to the Federation of Master Builders.

“The problem is that the loans available to these businesses often aren’t adequate enough to meet their needs,” says Hall. “At the same time, many of these companies are snubbed by high street lenders.”

As a result, he warns that many SMEs seek out other sources of finance, sometimes winding up with outdated products and high interest payments – or else companies turn to complex development finance loans.

Admittedly, there is a £2.5bn government initiative in place – known as the Home Building Fund – which offers finance to home building SMEs in England. But whether that money is being put to good use is another question entirely.

Research from LendInvest indicates that this initiative has financed 153 schemes, delivering 88,000 homes to date. But, 18 months since its launch, it’s not clear how much of this fund has actually been deployed to developers, with no data published from any authority on the performance of the loans either.

It’s a strange dichotomy – the government pledges to build more houses, but how does it expect this to happen without improving access to funding? As LendInvest points out, it cannot be left to the largest housebuilders to solve the housing shortage.

Chief executive Christian Faes says the only way to increase supply is by helping property entrepreneurs raise capital, leveraging both private and public sector investment.

SMEs are currently locked out of the housing market, but specialist lenders have the key to let them in

The big banks have been edging away from smaller businesses for years, so it’s not exactly news that SMEs across all sectors have been struggling to find finance. But the problem is arguably worse for property SMEs, which are held back by regulatory challenges, and are not eligible for the same tax breaks available to small businesses in other industries.

Also consider that the UK has the highest property taxes in the developed world, meaning many small builders are priced out of the market.

The good news is that specialist lenders can help solve the ongoing housing crisis. “If the government wants to hit its target of building one million new homes by 2022, SMEs will need to work with lenders that can provide a range of innovative loans,” says the Masthaven boss.

Hall points out that challenger banks can provide up to 100 per cent of build costs funded in arrears, and maximum loans to GDV at 60 per cent. “SMEs are currently locked out of the housing market, but specialist lenders have the key to let them in,” he adds.

Experienced lending businesses could even act as intermediaries to assess the creditworthiness of borrowers and allocate government funding, speeding up the process as a result.

This was actually a key recommendation in the 2016 Tailored Review of the Homes and Communities Agency – although LendInvest says this has not happened anywhere near as extensively as the industry would like to see.

To date, Homes England has only officially appointed one commercial partner, which suggests that the government body is failing to make use of the full scope of specialist lenders – companies which could go a long way to propping up thousands of SME housebuilders.

LendInvest questions why Homes England do not use a model similar to state-owned bodies like the British Business Bank (BBB) by making full use of the network of commercial partners.

The government has no hope of hitting its ambitious housebuilding targets unless it encourages a new generation of entrepreneurs in this sector

But what about getting local councils involved?

LendInvest suggests local authorities co-invest with alternative lenders in local developments, using a mechanism known as the Public Works Loan Board to offer discounted capital to small builders.

But the collaboration doesn’t end there, as LendInvest reckons more funding from the BBB could be allocated into the property sector.

“Until recently, the property market has been an untapped and overlooked market for BBB, which has focused on providing finance solutions for SMEs in almost all other markets across the UK economy,” the report reads.

It suggests that the BBB appoint more alternative lenders to underwrite property investment and development loans as part of its Enable Guarantee programme.

Essentially, the government has no hope of hitting its ambitious housebuilding targets unless it encourages a new generation of entrepreneurs in this sector. Finance is the biggest barrier preventing this, but specialist lenders cannot do this without collaboration from the state.

If the government is serious about solving the housing crisis, it’s got to think outside of the box, offering the alternative routes which our property market so desperately needs.

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