Alternative lenders are the key to helping reverse the decline of SME housebuilders

The UK has seen its small housebuilder demographic fall by 80% in a single generation. Funding, or rather the lack of it, has been and remains one of the key reasons for the drop. Paul Watson, Head of Origination at alternative development finance lender Blend Network, asks whether alternative lenders, with their flexible structure and dynamic approach to lending, can help reverse the ill-fated decline of small housebuilders.

Small and medium-sized housebuilders, defined as firms that produce 100 units or fewer every year, have fallen in number from over 12,000 in the mid-1980s to approximately 2,400 today. According to a 2017 report by the Home Builders Federation titled ‘Reversing the decline of small housebuilders: Reinvigorating entrepreneurialism and building more homes’, small builders are responsible for just 12% of homes being built in the UK today compared with 40% in the 1980s, with lack of funding for SME property developers as one of the key reasons. According to this report, availability and terms of financing for residential development have become extremely difficult for small housebuilding companies over the past decade or so. Lenders have drastically changed their attitudes to the construction sector since the 2008-09 financial crisis, and while small sites are consistently efficient in their delivery of new homes across multiple market areas, these are often the ones who struggle most to unlock funding.

In parallel with this lack of funding for SME property developers, the UK currently finds itself in the midst of the worst housing crisis in decades whereby there are too few homes available and those homes that are on the market are far too costly. For generations, successive governments have embarked on seemingly ambitious building programmes to solve the housing crisis. In 2017, the then Prime Minister Theresa May declared her ‘personal mission’ to solve England’s housing crisis by turbo-charging the delivery of new homes and pledged to boost the housing stock by 300,000 units every year.

However, with just over 170,000 new homes having been completed in the year ending June 2019 and with construction having taken a big hit during the pandemic, the Government is currently very far from reaching this target. So, it was unsurprising that the housing market featured heavily in Mr. Sunak’s Spring Budget as he laid out the UK’s COVID-19 response in early March.

We join in welcoming measures that allow an increasing number of first-time buyers get their feet on the property ladder. However, as development finance lenders work closely with SME property developers trying to channel much-needed funding into new housing, we urge the Government to also consider measures that tackle the supply side of the property market, especially more funding support for SME property developers and small construction companies. Failure to do so will risk further intensifying the decline of small housebuilders and deepening the existing affordability gap that continues to price out first-time buyers from the market in and around major UK cities such as London, Birmingham and Manchester.

Fueling demand without addressing shortage of housing supply and the challenges faced by SME property developers risks creating a ticking time bomb by further inflating prices in the medium to long term, and pricing out first-time buyers and professionals trying to get their foot on the property ladder.

So, how can the UK reverse the decline in the number of small housebuilders and help build more much-needed homes? More specifically, can alternative lenders help reverse the decline of small housebuilders and support the housebuilding activity in local communities, towns and cities where those houses are most needed?

The answer, in my opinion, is that alternative lenders can and must be part of the solution to the UK’s deep housing crisis that is making so many people unable to get their foot on the property ladder. The core role of alternative lenders in channeling much-needed finance to the construction sector was evidenced throughout 2020 when the pandemic meant many traditional lenders were busy trying to administer the Coronavirus Business Interruption Loan Scheme (CBILS).

Since then, the case for alternative finance has become increasingly compelling at a time when banks have continued to tighten their credit criteria and have had to face increased regulations and capital adequacy ratios restricting their lending capabilities. 

With their nimble set-up, dynamic lending criteria and sharp use of technology, alternative lenders are able to serve borrowers who have grown accustomed to faster, better and simpler processes. In a market – property – where time is money and winning a deal may depend on the lender’s ability to move quickly, speed is one of alternative lenders’ key selling points. Their online process and technology bandwidth help speed everything up. For example, at Blend Network we recently funded a £1,700,000 loan in just six minutes.

Their ability to provide higher gearing compared to traditional lenders is another major selling point in the case for alternative lenders such as Blend Network where we currently offer up to 68% Loan-To-Gross Development Finance (LTGDV) finance. This is especially important in the property sector where developers are often asset-rich and cash-poor looking to borrow as much as possible against their assets. Furthermore, alternative lenders’ flexible and individual approach to lending means they are often happy to fund quirky, non-off-the-shelf deals that traditional lenders wouldn’t typically fund. In other words, alternative lenders do not go through a box-ticking exercise.  

But alternative lenders must receive the support they deserve from the Government, and one concrete and effective way the Government can support house building is by working with alternative lenders to channel funding to SME property developers. Due to their nimble size, flexibility and efficiency, alternative lenders and P2P property lending platforms have demonstrated they can and must be part of the solution to the UK’s housing crisis.

Furthermore, these innovative FinTechs form part of a sector that according to the recent Kalifa review, generates £11bn in annual revenue. We hope the Government will recognise the key role of alternative lenders and bring them to the fold to solve housing supply crisis.

In summary, the case for alternative finance has become increasingly compelling, and I strongly believe the time is ripe for the Government to bring alternative lenders into the fold to solve housing supply crisis and help achieve its 300,000-unit annual housebuilding targets.