How can SME Developers Resolve the Housing Crisis?
With demand for housing in the UK surpassing the number of properties available on the market, how can developers address the surging number of potential homeowners? Paresh Raja, CEO of Market Financial Solutions examines whether SMEs could provide a solution
Paresh Raja, CEO of Market Financial Solutions
When considering the full range of investment opportunities available in the UK, it is difficult to overlook the historical performance of real estate as a safe and secure asset. In the UK, we’ve seen the property market bounce back from the 2008 financial recession to post record levels of house price growth.
Nationwide’s latest House Price Index revealed that the average price of a UK home has risen by 2.6% in the year to April, reaching £213,000. Moreover, despite the ambiguity surrounding the UK’s withdrawal from the European Union, a study by Market Financial Solutions found that over half of investors (53%) are planning to direct their capital into traditional asset classes, such as property, in 2018.
Buyer appetite is clearly strong, but with demand currently outpacing supply, the residential property market has become much more competitive for both first-time homebuyers and seasoned investors. There are simply not enough homes on the market, contributing to what has now been termed a ‘housing crisis’.
Fortunately, the UK Government has become increasingly proactive and creative in its attempts to address the current imbalance between demand and supply. Housing England has pledged to deliver an average of 300,000 new homes a year by 2025. There have also been proposals to introduce new planning reforms so that homeowners and developers can easily build additional storeys on top of existing properties.
While it is difficult to know how much direct influence the government has had so far in promoting the construction of new homes, the UK housebuilding sector posted a strong performance in Q3 2017.
According to industry figures, British construction companies applied to build the greatest number of new homes in a decade between the beginning of June and the end of September last year.
There’s no denying that these are positive signs for the industry, but with a new industry report claiming that over 340,000 new homes will need to be added to the market each year from now until 2031, are these steps enough in tackling the big issues facing the UK’s real estate sector?
Championing SME developers
The UK boasts a community of highly-skilled and experienced small and medium-sized enterprise (SME) house builders and developers. Their contribution to UK housing output was vital in the years leading up to the 2008 financial crisis. However, following the onset of the economic recession, the number of registered SME developers in operation has steadily declined. This was, in part, a consequence of the stringent lending measures introduced by mainstream lenders from 2008 onwards, protracting the time involved in acquiring a traditional loan for both prospective homebuyers and SME developers.
“ 90% of all home constructions in the past decade have been delivered by large corporations. ”
House prices are once again on the rise, and there is now renewed demand for real estate across the country. And while housebuilding has increased by more than 50% over the past three years, 90% of all home constructions in the past decade have been delivered by large corporations.
At this critical point in time for the property market, it is vital for the UK to ensure it is effectively utilising all available resources to ensure more homes are built. Part of this solution lies with SME developers, who currently number around 2,000 companies. It has been suggested that increasing the total number of small construction firms in operation back to 2007 levels could boot housing supply by as much as 25,000 homes per year.
What’s holding our SME developers back?
There is a range of factors inhibiting SME developers from effectively contributing to the existing housing stock, extending from planning permission and regulations to competition from larger firms. Of all these factors, access to finance has been identified as one of the leading constraints.
“ Traditional lenders are increasingly reluctant to approve loans to developers. ”
Since 2008, the ability to access the capital required to finance residential developments has become a much more onerous process. Traditional lenders are increasingly reluctant to approve loans to developers, and this is having the biggest impact on those businesses that deliver fewer than 150 homes per year. It has now become common for small home developers to apply for finance on a project-by-project basis. This is an inefficient approach that not only increases the amount of third party fees that need to be paid by the developer in arranging loan; it is also a stressful and time-consuming process.
If developers cannot quickly access the finance they need to purchase a site, they risk losing out on the opportunity. This is an industry-wide problem which affects the majority of SMEs – a survey recently revealed that the majority (57%) of small developers identified access to finance as the biggest obstacle they currently face. The challenge now is ensuring that more SME developers are able to access the capital required to pursue development opportunities.
Looking to short-term lending
The UK Government is conscious of the challenges facing SMEs and has stated that it plans on allocating as much as £1bn to Housing England in short-term loans to help fund small developers. This would offer much-needed relief but should not be seen as the only solution to the problem. It is important for developers to also have access to new sources of finance outside of the traditional avenues.
“ Gross annual bridging lending in the UK surpassed £5bn in 2017. ”
Alternative finance, such as bridging loans, have become an increasingly popular source of capital for those seeking to quickly take advantage of opportunities in the property space – gross annual bridging lending in the UK surpassed £5bn in 2017, which was a new record for the industry. The rise of the sector in the aftermath of the 2008 financial crisis came about as an alternative for those who were struggling to acquire a loan from a mainstream provider. Importantly, short-term lenders offer SME developers the ability to access credit quickly, promoting construction and increasing building activity across the country.
The housing crisis will pose significant long-term problems if not effectively addressed, and now is an opportune moment to ensure that policy and regulation is adequately geared towards encouraging residential construction. A key part of this solution is supporting SME developers to increase their housing output though access to finance. Thankfully, the rise of short-term lenders has meant that developers can look beyond traditional finance options, and consider creative new ways of raising the capital needed to commit to new building projects.