Lending in Uncertain Times

During an interview with Housebuilder Magazine, Stephen O’Brien, Wolsey’s MD, observed that over the last six to nine months the development market for SMEs has undoubtedly hardened with finance generally tightening, despite tremendous reginal markets variations.

“The south of England is tough and while the further you get away from London the easier it is, even the regional markets are not as warm as 12 months ago” observes Stephen, sighting an increase in applications for refinancing sites – a sure-fire indicator of a slower selling housing market.

The implication of the finance landscape constricting being that SME’s seeking development funding are now in an increasing number of cases expected to have more equity than a year ago.  

And the pressure piles on for smaller housebuilders, as added to these challenges, the eventual discontinuation of the Help to Buy equity loan is not doing anything to help. Wolsey favours schemes within the initiative’s parameters, but with thresholds changing in 2021, the market is now moving into the timescale where schemes will overlap.

What would really help SME developers now? Wolsey believes that the market needs a tax-friendly mechanism to bring equity. There are strong merits in allowing Enterprise Investment Scheme (EIS) tax breaks for SMEs building residential development to help them regain a foothold in housebuilding.

This would surely increase the number of smaller housebuilders operating in the marketplace, where their funding need right now is equity, not debt.

Wolsey, as specialists in residential development funding for over 25 years, have a wealth of knowledge to offer small and medium sized housebuilders. Talk to us now about any aspect of finance for housebuilding.

Development Finance is fit and well – how are you?

Stephen O’Brien, MD of Wolsey, has long been an advocate of the vital role that small to medium sized housebuilders have to play in closing the gap between supply and demand in both the short and medium term.

Over the past 30 years the proportional contribution from SME housebuilders has been falling - down from 25% of new builds in 1988 to just 12% in 2018 - and consequentially, the number of operators in the market has greatly diminished. This has been a worrying trend.

Particularly during the last decade it 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 development finance.

However, the opportunity remains excellent for SME’s 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.

A good scheme with sensible cost and income assumptions supported by a skilled housebuilder will secure funding from specialist residential development lenders.

Importantly though, as O’Brien points out, in current market conditions, the developer needs to demonstrate the scheme is robust in terms of build capability and with the marketing framework in place to achieve timely sales. Lenders need to see that the target purchasers are identified, the promotional programme (eg Help to Buy) is in place to attract interest and viewings; and, as importantly, the housebuilder can close a deal converting interest into a healthy flow of sales. 

While Wolsey looks at specific development opportunities with an experienced and specialist lending eye, the broader question is also 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.

Wolsey has long been an advocate of widening 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 (eg only available to Help to Buy qualifying schemes), limited to SME’s 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 housebuilding industry 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 becomes available only for first time buyers and with regional price caps, are 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 to 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 additions to the housing stock by 2020. In the first ten 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 for the good of the UK. The ability to raise equity for SME’s on acceptable terms on schemes aligned to Help to Buy will incentivise and assist the SME to grow and deliver more housing that meets the aims of Government policy. This would be a positive outcome for all involved.

The Government holds many cards – let’s hope it plays them well. 

This article appeared in Housebuilder & Developer

June, 2019

Residential developers in 2019: Demonstrate demand and your skills to convert into sales

“In the current environment, it is important to re-iterate to housebuilders and
developers that a good scheme with sensible cost and income assumptions (e.g.
sales rates and within Help to Buy parameters) can secure funding with Wolsey.
Brexit is a factor that needs to be recognised but once resolved, demand remains for
new homes at prices providing they are affordable.  We expect funding to tighten at
least in the short term, so funders will have more options and SME developers need
to remember this.      
The focus for SME residential developers must be to demonstrate both the sales
demand of their housing scheme and the ability to convert interest into sales to gain
support from funders.  Providing it is demonstrated, the sector provides attractive
returns which will in turn attract investment.
The broader question is perhaps what could Government be doing more of to
stimulate growth in SME householders to reinvigorate this segment of the sector and
create the big Nationals of tomorrow.  Equity remains the key issue from a finance
perspective and the ability to raise equity at sensible returns for SME housebuilders
and residential developers. 
Wolsey has long been an advocate of widening tax break initiatives such as
enterprise investment schemes to specifically target and encourage new residential
developers into the market and assist existing housebuilders to grow their
businesses. This would be a huge boost to the housebuilding industry bringing in
new capital and allowing sites that are currently too difficult and/or too small or break
even at best to become attractive opportunities for residential development."
Stephen O’Brien, MD of Wolsey Group
January 2019

Give SME Housebuilders the financial tools

Give SME Housebuilders the financial tools

Stephen O’Brien in Housebuilder this month talked about the importance of Government creating more initiatives, including tax breaks and enterprise investment schemes, that encourage small developers to grow and become medium sized developers. “We won’t get 300,000 without it!”

Wolsey wants to see their client’s grow and more developers enter the market, explaining that “a lack of capital is a significant issue when it comes to ensuring a healthy pipeline of SME’s”.

Giving SME residential developers the right financial tools will be the incentive they need to put more of their tools in the ground.

September, 2018

First rise in interest rate in ten years.

Wolsey comments: "the 0.25% rise in interest rate to 0.5% announced by the Bank Of England today is not in itself too significant to the residential development market in the short term, nor to Wolsey's lending criteria to SME housebuilders. What is more significant is that it is the first upward move of interest rate announced by the Bank for ten years. Does it mark the beginning of a longer term change in strategy? We will, of course, have to wait and see. But, the market is still a long way off the levels of interest rate that the Bank has set over the last fifty years or so, which averages out at around the 5% mark."

Do contact Wolsey for all your development financing needs.

2nd Nov, 2017