The Government has acknowledged that Britain’s housing market is broken and has published a White Paper aimed at tackling the crisis. Gavin Richardson looks at what this means for SME builders and property developers.
To quote the White Paper:
“The problem is threefold: not enough local authorities planning for the homes they need; house building that is simply too slow; and a construction industry that is too reliant on a small number of big players.”
It says that commercial developers still dominate the market, with Britain’s 10 largest housebuilding firms responsible for 60% of the country’s new private homes.
The report goes on to say that small builders were hit hard by the recession and their numbers have been declining in recent years. The number of homes registered by small builders is down from 44,000 in 2007 to 18,000 in 2015, which the Government says demonstrates the potential for growth.
In order to create more balance, the Government is going to encourage a greater diversity of homebuilders through an Accelerated Construction programme which aims to support local authorities who want to quickly develop on surplus land. In practice, the scheme plans to deliver 15,000 homes by 2020 on central and local public sector land in partnership with medium and smaller builders.
Reading the Accelerated Construction publication, the Government is also looking to ‘share greater risk and reward with our development partners’ by providing indemnities and sharing profits. So if you are an SME builder/developer it could be worth asking your local authority if they plan to participate.
Given that smaller housebuilders regularly cite land and planning (as well as finance) as the major barriers to expansion, the White Paper explains how the Government has simplified planning processes and will introduce permission in principle, which will hopefully remove some of the uncertainty for smaller builders when considering land options.
The report also sets out proposals to bring more small sites, that are more easily accessed by SME builders, forward for development. In particular, the Government will expect local planners to support homebuilding on small ‘windfall’ sites, i.e. sites not allocated in neighbourhood plans but which come to light on an ad hoc basis. It will also require planners to place great weight on using suitable sites that will accommodate fewer than 10 units, i.e. sites of less than half a hectare. This might be expedited by imposing Local Development Orders and area-wide design codes.
Whilst all of this sounds like good news, I expect that smaller housebuilders will be disappointed that the Government decided against the introduction of a local register of small sites.
The other major barrier to building for SMEs is, of course, finance. In this regard, the White Paper reminds us that its Home Building Fund, launched last October, will provide £1bn of short development term finance to SME builders to help deliver up to 25,000 homes for sale or rent during this Parliament. The fund is available via the Homes and Communities Agency to private sector builders in England looking to borrow a minimum of £250k to build a minimum of five homes.
The Government also plans to continue to encourage potential lenders into supporting SMEs with the finance they need to get building. The paper says:
“We will continue to work with the British Business Bank to encourage current and potential lenders and investors to invest in SMEs.”
As we’ve come to expect from Government, there is no detail here or on the BBB website. For those of you who have not heard of it, the British Business Bank (BBB) is a government-owned service aimed at making finance markets work better for smaller businesses.
From a broker’s perspective, lenders are becoming more receptive to loan applications from SME builders and developers but much more engagement with them is required and in my opinion, there isn’t sufficient engagement between the two to support the Government’s housebuilding programme.
Traditionally, the high street banks led the way in providing finance to builders and property developers. These days they tend to cherry-pick the best applications which is not helpful to builders with less experience. Also, if you go with a high street lender, you have to hand over your day-to-day business banking too, so you’ll be tied in. Having said that rates are currently fairly good, starting at around Bank Rate plus 4% for loans of £500k plus. Remember, there are in and out fees too totalling around 3-4% of the loan. If you’re looking to borrow less, then bridging finance is probably a better option with much more lending appetite out there.
Charging higher rates but requiring less tie-in, are the challenger banks and specialist lenders who seem to be taking a more pragmatic approach. With these lenders you can expect rates from 6-8% plus fees.
In my opinion brokers seem to have more success in getting loans for builders and developers than those who go direct. Whilst you might think that I’m bound to say that, I do believe it to be true because of the way that lending departments are structured. Most have a departments dedicated to dealing with intermediaries. They even send out business development managers to our offices to drum up business, whereas today’s direct-to-consumer call centre approach tends to see business customers pushed from pillar to post looking for someone who understands what they are asking for.
But I digress…
Overall, I would say that whilst it is encouraging to see the Government taking action to increase the country’s housing stock, this is not the first time we have seen bold promises to address the imbalance between supply and demand. Encouraging smaller developers to build houses is a much welcome step in the right direction, but further details of how the government intends to support lending to these organisations is required before a full assessment can be made.
As you can imagine, I’ll keep you posted. In the meantime, if you have any development projects pending, whether its new build, renovation or conversion, do get in touch on 0345 345 6788. We have a team of brokers who specialise in finding the right development finance for your projects. They’ll be happy to chat through your plans, free of charge and without obligation, even if you’re not at the finance stage just yet.
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