Stephen O’Brien of Wolsey explores the role of SME housebuilders in meeting the Government’s housing targets, and how specialist lenders can aid this process.
More homes were delivered to the market last year than in all but one of the past 30 years, accord- ing to Government figures. But, at the same time the proportional contribution from SME housebuilders has been falling – down from 25 per cent of new builds in 1988 to just 12 per cent in 2018 – and consequentially, the number of operators in the market has greatly diminished.
The last decade in particular has been a battering time for small to medium sized housebuilders looking to secure both the opportunity and the equity for development. For fit and lean operators working through those tough market conditions there is a market for specialist residential lending.
The opportunity remains excellent for SMEs, and the reason is simple. The essential driver for the industry is as strong as ever – demand. Shortfall in housing remains one of the key challenges for the UK economy as Government initiatives on housing demonstrate.
It is clear how vital the role that small to medium sized developers have to play in closing the gap between supply and demand is – in both the short and medium term.
While a good scheme with sensible cost and income assumptions supported by a skilled housebuilder will secure funding from specialist lenders, in current market conditions developers need to demonstrate a scheme is robust in terms of build capability and that they have the marketing framework in place to achieve timely sales.
Lenders need to see that the target purchasers are identified, the promotional programme (e.g. Help to Buy) is in place to attract interest and viewings, and, just as importantly, that the housebuilder can close a deal that converts interest into a healthy flow of sales.
The lending market knows the UK house-building sector offers attractive returns for the right scheme. While lenders will look at specific development opportunities with an experienced and specialist lending eye, the
broader questions have to be asked – what could Government be doing more of to stimulate the growth and contribution of SME housebuilders to the flow of new homes coming onto the market? Where could Government support and reinvigorate this segment of the industry and help create the big ‘nationals’ of tomorrow?
A key issue is the ability to raise equity at sensible returns for SME housebuilders, and it is an area that the Government should consider taking more positive steps to support.
One well-advocated idea is the widening of tax break initiatives such as enterprise investment schemes (given these structures are already in place) – to specifically target and encourage investment in new sites or residential developers, and assist existing housebuilders to grow their businesses.
The tax breaks can easily be aligned to Government policy (e.g. only available to Help to Buy qualifying schemes), limited to SMEs, and be allowed for a defined period to ensure the tax breaks deliver on the policy objectives of the Government and the needs of the UK economy.
This would be a huge boost to the house- building industry by bringing in new capital, allowing sites that are currently too awkward, difficult and marginal in profitability to become attractive opportunities for residential development.
Since 2013, the Government’s Help to Buy initiative for new-build has been a significant factor in enabling sales to be achieved. The impact of the changes proposed to come into effect in 2021 – when Help to Buy will become available only to first time buyers and with regional price caps – is unknown at present. However, it is reasonable to expect a rush before April 2021 of non-first time buyers looking to take up Help to Buy. Post 2021, it is likely there will be a shift of mix towards possibly more schemes working within the profile of the new parameters – terraced housing and flats, for example.
In 2015 the Government stated an ambition of adding one million units to the housing stock by 2020. In the first 10 months of 2018 over 360,000 planning permissions were granted in the UK, and the sector is well on the way to delivering that 2015 target.
To deliver these targets a healthy and growing sector of SME developers is required. The ability to raise equity for SMEs on acceptable terms on schemes aligned to Help to Buy will incentivise and assist the SMEs to grow and deliver more housing that meets the aims of Government policy. This would be a positive outcome for all involved.
It is extremely important for the UK that the national housing stock be substantially grown, and to do so over the medium term we need a vibrant SME sector. In order to allow those smaller to medium sized developers to achieve their potential, it is vital that there be a healthy lending market.
The Government holds many cards – let’s hope it plays them well.
Stephen O’Brien is managing director at Wolsey