Paresh Raja, CEO of Market Financial Solutions suggests the solution to the housing crisis could be down to SME developers.
Unfortunately, housing ministers are on high rotation; as soon as it looks as though reform will take place, political manoeuvring results in one minister being replaced by another. There have been 17 different housing ministers over the past 20 years, and with the housing crisis cutting off a growing number people from the property market, the question now is whether the Government can ensure a consistent and effective approach to addressing the housing crisis.
The crux of the issue is, of course, a dearth in housing supply – demand is outstripping supply, driving up prices for both renters and potential buyers, and thereby making it more difficult for people to access new property investment opportunities. Of all the solutions that can be applied to address these imbalance, building new homes in an efficient manner has become front and centre of current UK housing policy. The Government has its sights on encouraging the construction of as many as 300,000 new-builds each year in England alone.
This is a positive approach; however, there are those in the industry who feel this target is simply not sustainable given the challenges facing developers and current resource availability. Earlier in the year, it was revealed that only 12% of charted surveyors think this target is attainable. So, in order for the Government to reach its ambitious goal, what are the challenges currently being faced by SME developers that are preventing them from achieving their maximum output capacity?
Supporting SME developers
Since 2008, accessing the capital required to finance residential developments has become a much more onerous process. Traditional lenders are increasingly reluctant to approve loans to developers, and this is having the biggest impact on those businesses that deliver fewer than 150 homes per year. It has now become common for small home developers to apply for finance on a project-by-project basis. This is an inefficient approach that increases the amount of third party fees that need to be paid by the developer in arranging loan.
If developers cannot quickly access the finance they need to purchase a site, they risk losing out on the opportunity. This is an industry-wide problem that affects the majority of SMEs – a survey recently revealed that the majority (57%) of small developers identified access to finance as the biggest obstacle they currently face. The challenge now is ensuring more SME developers are able to access the capital required to pursue development opportunities.
For SME developers to reach their full potential, it is vital for them to look beyond mainstream lenders and consider the full range of alternative finance options, such as bridging. Thankfully, lenders in this space look favourably upon small construction companies – a survey among the members of the Association of Short-Term Lenders (ASTL) earlier this year found that 93% of respondents believed short-term finance was ideally positioned to support SME house builders in the future.
The importance of small developers in helping address the imbalance between housing demand and supply cannot be understated. A report from 2017 found that over the past 25 years, the number of operating SME builders has been reduced by a dramatic 80%. Such a dramatic decline reflects how much of a hindrance these challenges are for small builders, with many failing to scale-up and grow. The same report found that should the number of SME builders return to what it was in 2007, approximately 25,000 additional new homes could be produced each year.
Policy and initiatives designed to encourage SME developers to achieve their maximum output new build homes are needed. Doing so ensures the UK effectively uses its available resources, increasing the housing stock and making the property market more accessible for prospective home buyers.