Housing: You can’t build, build, build without the money


Smaller building firms, architects and individual developers have been starved of funding for the past 30 years and it’s holding house building in the UK back. Big developers hoover up building permits and sit on them, producing far fewer homes than needed. According to specialist mortgage broker Mortgages for Business, while they’re keen to blame the planning system, four fifths of residential planning applications are now accepted.

Paul Keddy, the head of the specialist development finance desk at Mortgages for Business, says, “Permits to build more than a million homes remain unused. By contrast, small sites are consistently efficient in their delivery of new homes. Small house builders are on track to build 70,000 more homes a year in the coming decade and we calculate the sector could start another 70,000 homes in the UK if access to funding is sorted out.

“Over the past 30 years, and in the past 15 in particular, it’s been getting harder for SME developers to access finance. That has strangled their capacity. You can’t build, build, build if you don’t have the money. In the year 1988/89, SME developers started work on building approximately 88,000 dwellings in England. In 2019/20, SME developers started work on building approximately 17,000.”

In the 1980s, small builders were responsible for 40 per cent of the homes being built. They are responsible for just 12 per in the UK today. While there is a long way to go, over the past five years, Mortgages for Business says the number of lenders offering development finance – short-term loans for residential property construction with the money released in stages – has increased by more than half.

Over the past five years, almost 40 lenders have either started to offer development finance or have come to the market for the first time. Increasingly, they are lending across the country, rather than London and the South East – their traditional preserve. More competition means better criteria, higher gearing and the chance for developers to make more money.

The majority of these new lenders are for developers with relatively small deposits – companies looking to build six properties on a patch of land, rather than hundreds. Increased rivalry means lenders are having to offer more competitive deals – and that is set to have a direct effect on the number of new homes built in the next year or two.

Paul Keddy says that while is likely to turbo-charge SME house building in the medium term, the growth also masks some complexity in the market. “In 2008, the biggest 40 lenders in the space were all banks. Since then, nervous high street lenders have gradually withdrawn from the market. As a result, banks now make up just 15 per cent of the biggest 40 lenders offering development finance. Less well known, alternative non-bank lenders now represent a much greater share of the market.

“Most of the high street lenders which are still in the game are also not pricing to compete. Once, clearing banks were lending at 4 per cent, now they’re lending at up to 6 per cent – and at a time when the Bank of England base rate is at just 0.1 per cent. Their due diligence and internal processes slow them down. Some clearing banks are taking up to five months to do deals whereas the right challenger bank can get a deal done in half the time.”

This bifurcation of development finance – between buccaneering non-bank lenders with appetite to lend and cautious, traditional high street options – is making it harder for those less experienced to navigate the market.

“Non-bank lenders haven’t been around for hundreds of years and don’t have the huge brands that developers recognise instantly,” says Keddy. “That means, even for experienced developers, but especially, architects and contractors who want to start developing, it’s actually harder to find the best loans than it was 15 years ago, leaving most having to consult a specialist broker.

At least the money is there now. Given access to finance, we could be seeing the start of a new golden age for SME housing development. This is not pie-in-the-sky stuff and I am putting my money where my mouth is on this one. Our own expansion plans are conservative and we still expect to triple the number of loans that our development finance desk writes over the next 12 months.”

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