Lending a hand

With UK builders failing to keep up with demand, Mark Holden of Go Develop offers his view on how financiers can help SMEs reach Government targets.

Regardless of snap elections and Brexit, there’s a bigger underlying issue at the heart of our economy – the British housing market remains chronically undersupplied, and has done for the last two decades.

Various figures are bandied around, but many agree that around 300,000 new homes need to be built each year to cope with demand, even if net migration were to fall substantially.

There has been some improvement. In 2015-2016 almost 190,000 net additional homes (including 164,000 new builds) were created, but even this is 15 per cent below the 2007-08 peak. With still only about half the necessary homes being built each year, this situation is only likely to worsen before it gets better.

For the past decade, SME housebuilders and developers have had a particularly tough deal. Between 2007-2009, with the financial crash heavily affecting businesses, a third of small companies ceased building homes.

Over half the country’s new builds are built by just seven PLC housebuilders, who have the scale, finance and synergies to dominate. It’s a tragedy that, along with the usual challenges of red tape and bureaucracy, many lenders simply shut their doors to small and medium housebuilding companies, scared of their own shadows and that of the regulator. LTVs (loan-to-value mortgages) have been wound back, and policy U-turns continue to be a problem.

Decision making in the UK is slow, inefficient and dysfunctional, and time drags on – time delays being a housebuilder’s number one enemy. Now we have the rising cost of imported materials (thanks to the drop in sterling) and the fear that one in four construction workers could be lost from a ‘hard’ Brexit. With short term sentiment fluctuating as every piece of Brexit news is aired, it’s plain to see that housebuilders are continuing to face some challenging circumstances, and it’s the job of land and build funding companies to help them as a strategic partner.

The Government continues to meddle with the sector by way of its tax and regulation obsession and recent changes to stamp duty, including a second home buyers tax. It’s in this sort of environment where housebuilders and developers in need of finance, must seek out a fast, flexible and compliant alternative to the mainstream lenders that are of poor quality and are often inefficient.

Most banks simply don’t understand the essential partnership of developer and funder. From a ‘computer says’ mentality to an over-reliance on a less-than-perfect credit records, hurdles such as these can leave a great new build project dead in the water, with banks applying the selective amnesia that they are so well known for.

Since the credit crunch, mainstream lenders have been slow to return to small-scale development finance, if they have returned at all. Many focus on a developer’s history as the be all and end all – ignoring both the merits of an individual build project and the fact that even the best developers can have setbacks over the years.

For specialist funders that know property and ignore macro-economic noise, the playing field looks different. Free of the capital restrictions and overhead costs that banks have to contend with, they can offer tailored financing that fits.

The possibility is there to select companies who offer unique solutions to funding, such as supporting their partners with 100 per cent LTV full funding for all land and build costs. The best companies will cover all a developer’s soft costs and SDLT.

It is important to choose a reputable company that can consistently guarantee funds on time, with a fast and fuss free nature that’s easy to do business with. This ensures developer partners can do what they do best: crack on and develop.

When working in partnership with a dedicated property financier there’s just one, close relationship, one set of legal fees, and one survey fee, keeping things simple and efficient. No long-winded inter-creditor agreements and red tape – just a one-stop funding solution.

Making things easy for its partners and keeping its criteria simple is the mark of a good financier. Some of the better companies, for example, focus on experienced new build developers, preferably with planning in place and a target GDV of £2m-£15m.

A project can then be swiftly appraised and a profit share agreed, usually with developer partners keeping the lion’s share of profits and allowing them to expand their operations, stretch their capital over multiple sites and secure more brand flags in the ground.

Helping to return the number of housebuilders in operation to 2007 levels could equate to boosting the housing supply by 25,000 homes per year. It’s vital to cut through the lenders doing U-turns, cut through the macro-economic noise, and be certain that in these uncertain times, housebuilders and developers can use an investor’s money to make more for themselves.

Mark Holden is MD at Go Develop