Adam Lawrence on SME Finance

The planning process is often cited as the major constraint against more homes being built and it was good to hear that the government has announced a relaxation of rules around planning requirements that are no longer viable. The Government’s localism agenda is now in place and we will have to see whether this has any significant impact. There is, however, a far more significant hurdle facing small to medium-sized developers – lack of finance.

Housing supply in London is still one third below the Mayor’s minimum target and the 11 per cent fall in housebuilding starts nationwide since the end of last year demonstrates the seriousness of the current housing crisis. 

So far, the Government has focused on the major housebuilders with its buyers’ initiatives. They may be quoted companies but, collectively, they now deliver less than one-third of homes built in Great Britain. In 2011, the top 10 housebuilders completed 48,020 homes out of a total of 136,690 homes. The majority were developed by small to medium-sized housebuilders.  In 2007, the top 10 delivered just over 80,000 homes, against nearly 212,000 in total.

Of course, the boom days of 2007 when the industry was high on cheap, abundant debt, are long gone but it is obvious that the sector taking the biggest hit is the small to medium-sized housebuilders. This is not the result of a lack of sites or ambition but access to development finance.

Over the past 20 years in the housebuilding business, most of my time would have been spent on planning and design to add value to a site.  Now, I spend hours discussing project finance, particularly debt. We are fortunate that we have excellent support from our backers. However, many small to medium housebuilders are having a very different experience. Banks are being ridiculously draconian in their approach to lending.

Finance has gone from feast to famine. We buy land from administrators and we have seen how the banks were approaching lending four or five years ago. There was scant due diligence and reckless lending. I am not suggesting there should be a return to the days of banks fuelling the boom but there must be a middle ground.

Britain needs to build at least 250,000 new homes a year to match population growth and other demographic trends. Recent calculations have shown that the cumulative housing supply shortfall of recent years has now reached over one million.

If the lack of finance continues, this shortfall will more than double by 2020. When housebuilders are allowed to get on with development, we create homes, jobs, improvements to public spaces and community facilities through planning gain requirements. We also generate billions for the UK economy.

More flexible facilities are needed to support small SMEs during the development process.  Unless you are one of the privileged few, funding sites on an individual basis invariably with SPVs, with developers being asked to put their cash in up front, is too constraining t to then develop multiple sites as they were once able to do.  This funding is not conducive to positive house building thinking.  Even on the most typical of housing sites, there is no incentive for the developer to generate early cash as this would be held by the bank until the debt is repaid.  It is not good enough for the Government just to put pressure on the banks, but also the structure of how they are lending it.

This comment piece appeared in Estates Gazette on 24 November 2012