Robert Orr, non-executive director at Atelier, looks at the crucial role SME builders will need to play in achieving the government’s housing target and how specialist lenders have the expertise to support them.
The government has unveiled a series of ambitious promises to increase the delivery of new homes, and this will place greater scrutiny on how the development finance sector can step up to support those plans. SME developers will play an important role in the delivery of these new homes and specialist lenders will need to provide financing that supports SME developers to be more agile and effective.
Statistics from the Federation of Master Builders found that SME housebuilders deliver 12% of UK homes, compared to 40% of homes 40 years ago. This dramatic change in proportions can partly be attributed to the changing perspective of bank lenders. After the 2008 global financial crash, mainstream banks have often focused on increasing lending to larger property developers with the amount of lending to these schemes going up by 25%, from £5.6billion to £7billion between 2017 and 2024. Lending to SME property developers, however, has nearly halved in that same period, with the value of loans down 49% from £9.7billion to £4.9billion in those eight years. Whilst some of this reflects the decline in the number of SME developers, it also confirms a certain lack of risk appetite amongst mainstream banks.
The past few years have also seen a series of events disrupt the market – from Brexit to Covid followed by the increases in building material costs. Economic uncertainty around tax increases, inflation and interest rates will undoubtedly continue to impact sentiment in the housing market for some time to come.
When all this is combined with continued difficulties in obtaining planning consents, new environmental requirements, shortages of skilled labour, new regulations on tall buildings, the withdrawal of Help to Buy, ongoing CIL & S106 requirements impacting site viability and continued high land prices, the challenges currently facing SME developers in delivering new homes are clear and in truth, a bit daunting.
Whilst a lot now rests with the government to put words into action, specialist lenders, such as Atelier, can also help get SME developers building. Specialist lenders have a deeper understanding of the development sector and consequently a higher risk appetite. This allows them to provide a higher percentage of the overall costs of a project than mainstream banks would generally be comfortable with. That’s important as SME developers do not often have deep financial resources and some of their third-party equity providers may also be feeling less confident given the difficult market over the last few years.
At Atelier, we particularly recognise the importance of lending as much as possible towards the day one advance to acquire the site, thereby keeping initial client equity to a minimum. Obviously, this needs to be done in a sensible way, but the ability of SME developers to deploy their available equity over a number of sites is clearly beneficial for the ambition to materially increase the number of new homes being delivered.
Specialist funders can also use their deeper knowledge of the sector to take commercial views on allowing building to start, where mainstream banks may want to see every box ticked before deploying funds. Every scheme will be different but at Atelier, we are used to taking sensible views on lending to allow schemes to progress whilst various paperwork is followed up, often with understaffed local authorities. Processing the monthly build drawdowns within 24 hours of receipt is also another important way in which specialist funders can keep building sites progressing at pace. SME developers who are able to pay their sub-contractors promptly will usually find their sites moving more quickly towards completion compared to those with regular delays in settling invoices.
Once a scheme is up and running, it’s important that the regular problems which developments incur such as bad weather, cost overruns, and utility connection delays, are met with an understanding approach by the lender. Fundamentally, we share the developers’ desire to buy, build, sell and repeat.
If the government’s ambition of 1.5 million new homes over the next five years is to become close to a reality, SME developers are going to be an important part of the mix. Whilst new towns have the potential to be key contributors to new home numbers, the reality is that these will take several years to make a difference and, given the significant road and community infrastructure involved, are going to be the domain of the national housebuilder and large private developers.
SMEs have always contributed to the development sector by focusing on smaller, bespoke projects that volume builders often overlook in favour of large, green field schemes. This is particularly true when it comes to repurposing existing buildings, airspace developments and brownfield sites. The knowledge of specialist funders around the particular challenges of such sites and their willingness to accept sensible risk is just another way in which they can support SME developers.
Overall, a thriving SME development sector which can start to move back to the levels of new home contributions not seen since 2008 will be good for developers, lenders and the ambitions of this government. There are plenty of challenges to overcome to make that a reality, most of them within the remit of the government. We applaud the ambition and now wait for the action. In the meantime, well-resourced, specialist lenders understand the vital role they have to play in making sure funding is in place to get SME developers building again.
