Scratch the surface, however, and it becomes clear that development finance is increasingly a two-tier affair. The primary beneficiaries of this cheap debt are large developers, which continue to post record profits. These firms have little problem accessing bank funding, which while generous in its terms is still highly selective; available to only the strongest schemes backed by the most credit-worthy sponsors.
On the losing end of the spectrum are small and medium sized developers, which are struggling to access finance. Activity for these firms is increasingly opportunistic and very hit-and-miss, as the difficulty of finding brokers that can provide both equity and senior debt makes it hard to move quickly.
This speaks to a long-term trend – take private sector homes, where between 1988 and 2013 small developers’ share of the market dwindled from two-thirds to just over a quarter. But new restrictions on bank balance sheets post-crash are exacerbating the situation; in a recent National House Building Council survey, half of the smaller building companies questioned said banks’ reluctance to lend had become a ‘serious impediment’.
This is a serious problem. Not just for these developers, who have far less control over their projects relative to those providing the equity – but for society at large. We are in the midst of a severe housing crisis. To cope with rising demand, England needs 260,000 new homes annually, and the current rate of new supply is less than half this. Much of this burden is being borne by big developers, who have warned that they alone are not in a position to sufficiently increase supply.
It isn’t just about new build. Solving the problem will require the conversion of office and light industrial property for residential use. Changing work habits are driving a long-term decline in demand for office and commercial property within urban environments – vacancy rates in this sector range between 15 and 18 per cent, and are set to rise. CLG figures put the number of empty non-residential properties at around 266,000 units, and a report last year revealed that around 6.8m square feet of redundant office space in the UK had been earmarked for conversion – equivalent to the entire office space of Oxford!
The Government has recently made changes to planning law to make conversions easier, but this won’t achieve much if the money isn’t there to finance these projects. So long as small to medium sized developers struggle to get funding, this area of the market will go under-serviced.
So what can be done? Well, as if often the case, technology promises an answer. One of the defining features of our current age is the rise of online platforms that link supply and demand, problem and solution, with efficiency and ease. Think eBay, Uber, AirBnB, and so on. The same principle applies here: there are plenty of professional and institutional investors out there struggling to generate returns in traditional markets, for which these small to medium sized development projects would provide a great investment. The key is to create a means by which investors and developers can find each other, in such a way that the latter can move quickly to seize on project opportunities.
This is already starting to happen at the smaller end of the property development market, with the entry of peer-to-peer crowdfunding outfits into the space. But there is significant danger here – investing in property development is a far cry from investing in, say, a tech startup. It is a far more complex affair, and generally unsuitable for retail investors who are unlikely to understand or appreciate the level of risk involved. It is a matter of time before those dabbling in this area get burned – ultimately, peer-to-peer development finance is as unsustainable as the issue it purports to solve.
What is needed, instead, is the same concept, but on a ‘pro-to-pro’ basis – the same means of bringing developers and investors together, but ensuring that latter pool is restricted to professionals who know what they’re doing. This would not only end the unhealthy dominance of large developers, but also represent a crucial step towards a solution to the UK’s chronic housing shortage.
Attributed to InvestSure