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Life for small and medium-sized housebuilders can be tough compared to the big companies, which have large balance sheets and land banks.
As far back as 2016, a House of Lords report said that the market for new homes “has all the characteristics of an oligopoly”, after hearing evidence that the eight largest housebuilders accounted for 50% of completions.
Nobody really gains from such concentration, least of all first-time buyers. Not only are house prices higher than they might otherwise be, but some large builders also place far too much focus on achieving their profit forecasts and driving up their margins at the expense of quality. And they prefer to develop very large sites of hundreds of homes with heavy environmental footprints, which do little to revitalise town centres and create communities.
There are many reasons for this lack of competition, but one that has gained too little attention is access to finance. Ever since the financial crisis in 2008, banks have proved increasingly reluctant to lend to smaller builders, partly due to new regulations.
That is why there is an increased demand for a funding mechanism designed to support SME housebuilders. These businesses are an under served part of the market that face significant challenges with access to traditional finance.
There is a need for an entirely new asset class of debt funding: a source of institutional lending to small and medium-sized housebuilders. This could be done because every loan could be secured on the underlying assets (such as the land), allowing for money to be directed to these SME housebuilders which, in turn, can unlock many of the challenges facing the industry, our towns and cities.
Supporting smaller housebuilders with institutional capital encourages “levelling up” of the country and the construction of sustainable homes. SME housebuilders can develop sites overlooked by large housebuilders, serving a diverse range of smaller housing communities right across the country, and contributing to addressing the housing shortage seen in all regions of the UK. This will also support the creation of local jobs in these regions.
It’s not just the levelling up agenda that SME housebuilders can play a role in. The issue of sustainability looms large over the housebuilding industry, and smaller regional builders can be nimble and innovative in relation to the methods applied to housebuilding, achieving greater environmental gains. SME housebuilders are in a position to make more sustainable choices throughout their project, from the designs of the properties to the materials that go into the houses they build. As the government seems to be arguing now, we need to see sustainability as the future of housebuilding in the UK, and SME housebuilding is the key to this.
Old hands in the housing market will tell you that small and medium sized builders, with good local knowledge, good craftsmanship and a tradition of innovation, were once the mainstay of the industry. They also made their reputations with smaller developments on the edges of towns and villages or in brownfield locations. We need to recover some of that entrepreneurial spirit by ensuring their successors can get access to certain and reliable finance on reasonable terms once more.
Simon Champ is a partner at Newstead Capital