SME property developers are on life support – Alternative Finance will speed their recovery

The current state of play

The National Housing Federation (NHF) recently revealed that an estimated 8.4 million people are living in “unaffordable, insecure or unsuitable” housing. This is a disturbing statistic that the government, housing industry and traditional finance providers are unlikely to resolve anytime soon. Afterall, the government is already having trouble delivering its commitment of 300,000 homes new homes by the mid-2020s – A problem further exacerbated by recent research from real estate provider Savills, who have warned that house building will need to increase by as much as a third, if the government is to meet its commitments.

Yet there is hope in the form of the UK’s underutilised and underappreciated small and medium-sized (SME) property developers, who, with the right investment and support, can have a key role to play in addressing the current housing crisis. 

Minister for Housing, Ester McVey, acknowledges this stating “We need to open up the industry and bring back the small and medium housebuilders, 30% of which we lost in the financial crash of 2008 and never returned to the sector.” Unfortunately, the current situation of SME developers is precarious. The Home Builders Federation (HBF) report “Reversing the decline of small housebuilders” reveals that in the past 25 years, the number of SME developers in total has been reduced by around 80%. If their numbers were brought back up to their 2007 levels, an additional 25,000 homes a year could be produced.  

Bye-bye to “help to buy”

The decline in numbers of SME property developers can be attributed to a range of factors, including a costly and complex planning system, a limited labour supply, and access to land and finance. The latter demonstrated by entrepreneurial developers unable to access capital via the Enterprise Investment Scheme, and the British Business Bank not supporting non-bank lenders aimed at the property sector.

The situation for SME developers will only get worse when the Government’s controversial “Help to Buy” equity loan scheme is phased out in 2023. First introduced in 2013 to “deliver the homes the country needs”, the National Audit Office (NAO) has found that the scheme enables a third of buyers using it, to buy a home that they previously were unable to afford. 

Not only has it been a lifeline for buyers but for SME developers as well. As they no longer need to contribute any capital to the sale of new builds, their level of risk is reduced. This improves cashflow allowing for more money to be allocated to development, thereby increasing sales. That is why more SME developers have joined Help to Buy than any similar scheme in the past, with 2000 registered at the end of last year according to the NAO. 

However, there has been much criticism in the political and media spheres of Help to Buy, after the NAO reported that it had predominately helped to support the annual profits of the UK’s five biggest developers, given they accounted for half of the sales made through the scheme. This has led to accusations that it merely subsidises large housebuilders and pushes up the price of new homes.

Regardless, the scheme’s withdrawal will impact on the finances of SME developers, consequently affecting what they do best…build. 

It’s time for an alternative

The ability of SME developers to access finance is a common and justified complaint. 

The NHBC Foundation, the National House Building Council’s independent research institution, has found that availability of finance is the first concern of 20% of companies they surveyed, and the second most serious business challenge of a further 18%. 

When applying for a loan, many start-ups and SMEs can’t be bracketed into the financial tick box culture of traditional banking and are therefore dismissed out of hand. Consequently, property SMEs are turning to alternative finance providers to fill the funding gap. At Godwin Capital we have seen an increase in uptake for bespoke funding options that addresses the unique situations of smaller businesses. 

Some are unsuitable for investment but a large number are viable businesses that have been overlooked by traditional Lenders, assuming a worst-case scenario, worried that their fingers will be burnt by another financial crash. Their Inaction means lost opportunities and the continued structural decline of SME developers.

Unleash our property SMEs

The UK’s housing situation has improved but not enough to escape the current crisis we find ourselves in. Our SME developers have whittled away over the past decade and those remaining find it difficult to grow and prosper, while the larger players continue to dominate the majority of sales. 

If we are to see increases in housing supply, SME developers must be fully embraced by the government and the banking industry. These institutions must create the conditions for them to thrive by ensuring they have better access to finance. In the meantime, alternative finance providers are stepping in to remove barriers to their growth. By unleashing our property SMEs, the UK will have a real opportunity to increase the housing supply and boost opportunities for people, business and developers up and down the country.