Lending to SME property developers has nearly halved since 2017, with the value of outstanding loans to SME developers down 49% from £9.7bn to £4.9bn in the eight years to November 2024.

It comes as banks pull back from lending to smaller housebuilders, says CapitalRise, an Innovative Finance ISA provider.

However, CapitalRise says that investors in Innovative Finance ISAs (IFISAs) can play a critical role in funding smaller property developments in the UK, with banks less able to provide finance to them as a result of changes in regulations brought in following the financial crash of 2008.

It says that banks have instead focused on increasing lending to the biggest property developers with the amount of outstanding lending to those businesses up by 25% over the same period, from £5.6bn to £7bn. This allows banks to lend in larger lot sizes and lower their costs, increasing overall returns.

Overall lending to property developers has fallen by 22%, from £15.3bn to £11.9bn since January 2017. This fall in lending has contributed to the shortage of new housing built in the UK over recent years.

Can’t rely on bank lending

SME developers have traditionally played a key role in delivering new homes in the UK – especially on smaller sites in prime postcodes that may require specialist experience and highly-skilled workforces to deliver.

Uma Rajah, CEO of CapitalRise, says that IFISAs offer people the opportunity to step in and help to close the ‘funding gap’ for smaller property developers, particularly in the luxury property sector where there are more SME developers.

“Smaller property developers can’t rely on bank lending in the way that they used to,” he says. “Since regulatory changes that came in the wake of the global financial crisis many of the traditional institutions have felt the need to step back – there is a real gap in financing for SME developers now.”

“In areas like prime property, small developers are critical to the market. Large developers tend to focus on major developments of hundreds of homes. Getting funding to those smaller developers is vital.”

“Private investors have a real opportunity to play a role in getting that finance to the developers who need it. The lack of bank funding in the market means that the rates on offer can be very attractive for those who are willing to put some of their capital at risk.”

CapitalRise’s IFISA product allows individuals to invest in opportunities that provide development loans to property developers, with returns in 2024 having averaged 9.26 per annum. It focuses on financing luxury properties in some of the most desirable areas of London, such as Mayfair, Chelsea and Bloomsbury, as well as the wealthiest areas of the southeast of England.