As with many industries, the funding issue for SME housebuilders goes back to the financial crisis. Pre crisis there was a significant ecosystem within the major banks lending to SMEs, which were able to access credit easily and run on little real equity.
This enabled established small players to operate an equity-light model, with planning gain and recycled profits covering the majority of their project equity.
As the crisis struck, banks shrank their balance sheets and these easy credit lines dried up, stranding many businesses and causing a huge amount of damage to the sector.
Post crisis, there was a period where funding was simply not available to businesses of a certain size and this has taken time to recover, with challenger banks and alternative lenders now stepping into that space.
The biggest hurdle now for the SME sector – and particularly those players looking to grow quickly – is finding equity. Re-establishing a sector of the scale that was lost will require a huge amount of investment as SMEs in high-growth mode cannot purely rely on planning gain and retained profit to fuel their growth.
- Planning granted to build 56 homes on former hospital site
- SME housebuilder secures £3.75m equity investment
- Construction SMEs report rising workloads
But the market is definitely improving. The main driver of this – in my view – is the increase in competitiveness in the debt space as the support system required to fund SME housebuilders has been rebuilt by entrepreneurial alternative lenders and challenger banks.
There are now many relatively established and professional alternative lenders for developers to work with. In turn, this has started to drive specialist investors seeking higher yields up the risk curve, which results in increased equity lending.
From the other side of the equation, government-backed players, such as the Housing Growth Partnership, are providing both a source of capital and a lead to the market on how JVs can work.
Overall, this increase in the availability of capital will be good news for the resurgence of the SME housebuilder, which in turn will increase competition for buyers and, therefore, the quality of what gets built in the UK. This has to be a positive for the UK housing market.
All of the above said, there are still challenges for SMEs. In seeking the right investors, you’re looking for people who are comfortable with the risk you are able to offer them and who you are comfortable paying a fair return to for the risk they are taking.
My view is that this isn’t currently a mindset prevalent in the SME space. This may explain why the SME sector has been slow to recover, but also points to why in some areas this is changing, and we are starting to see significant progress.
I’m still learning a lot about the housebuilding industry, but as far as finance goes, I’d offer a few tips:
- Be as ambitious as you are comfortable being. The housing shortage won’t solve itself over night, so there is going to be an opportunity for all of us to be busy for a while to come
- Set yourself a target and work back to understand what funding you need to achieve that
- Be prepared to pay for the risk people are taking on you and your business
- Ensure you are able to understand the pricing of any investment you are being offered
- Be as open as possible with your investors and be firm – both with yourself and others – on what you will and won’t give to secure the investment you need to achieve your aims.