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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