Sales guarantees could enable SME housebuilders to deliver 55,000 extra homes per year

SME housebuilders could bring forward more than 55,000 additional new homes per year, adding £12.9bn in GVA and supporting nearly 200,000 jobs in the construction industry, according to new research by Savills commissioned by LDS Sales Guarantees.

The Savills report — which assessed the total size of the 15-60 private unit site house-led development market — estimates that 370-550 small house-led sites (equating to circa 9,000-14,000 new homes) are being delivered in England and Wales per year. 

It also reveals there are 136,000 homes yet to start construction or gain consent on small house-led sites (defined as those with plots of between 10 and 78 homes), with an estimated development value of around £40bn. 

In January, LDS launched a new proptech engine enabling SME housebuilders to obtain instant sales guarantee proposals. 

LDS Sales Guarantees underwrite the financing of development sites, guaranteeing that SME housebuilders can call on LDS to complete on any unsold homes.

Since its launch, over £1.5bn of LDS Sales Guarantee proposals have been issued.

The research paper explored the potential impact of LDS Sales Guarantees on the SME housebuilding market and showed that they increase access to debt and reduce developer equity requirements by around 77%, meaning that SME housebuilders can create between three and four times more housing output with the same equity than via traditional financing routes.

According to the Home Builders Federation, an estimated 22,060 new homes per year were delivered by SME housebuilders in 2019.

When compared to 1988, when SME housebuilders built 39% of homes in England, the drop is equivalent to the loss of at least 64,000 homes per year, with a GDV of £20bn.

The report revealed that boosting current SME housebuilding figures by the multiples that LDS Sales Guarantees could bring, could deliver approximately 77,210 homes — 55,000 of which would be additional new homes. 

Further analysis by former HM Treasury and MHCLG economist, Chris Walker, found that the extra homes would support more than £12.9bn in GVA per year, of which at least half would be net additional to the economy.

The research highlighted this would support nearly 200,000 jobs in the construction industry and its supply chain.

"The proportion of homes being constructed by SME housebuilders has dropped steeply over the past three decades,” said Chris.

"This new analysis shows that development finance is a significant barrier for SME housebuilders, which is reflected by the fact that SME housebuilders are unable to deliver the homes they already have planning permission for.

“The LDS Sales Guarantee approach could help unblock this development finance barrier enabling SMEs to build thousands of extra new homes.” 

Mark Hawthorn, CEO at LDS Sales Guarantees, commented: “Obtaining planning permission isn’t the only obstacle to building homes — even though it is the most focussed on. 

“A major factor preventing additional housebuilding is the decline of SME housebuilders.

“We commissioned this research to show that the decline of SME housebuilders has been driven by a number of factors, a very significant one being the ability to access development finance on viable terms. 

“We’re committed to working closely with SMEs and the supply chain to fully understand the challenges and will be carrying out ongoing research to inform our product development and to ensure we can help them overcome the hurdles. 

“By guaranteeing to buy homes built by SME housebuilders, we are proving that we can transform the financial viability of SME housebuilding and enable them to build thousands more homes every year.”

Lucy Greenwood, director of residential research and consultancy at Savills, added: “SME housebuilders have faced a number of challenges in recent decades, but there is positivity in the market. 

“The potential is there for SMEs to increase their output — if more can be done to help them deliver the additional homes. 

“Unblocking the finance barrier is a key step that will help enable this growth.” 

Roxana Mohammadian-Molina, chief strategy officer at Blend Network, said that the report went a long way towards identifying viable and practical solutions to support this sector.

“Availability and terms of financing are clearly a key issue faced by SME housebuilders as banks and traditional lenders no longer have the appetite, or the capacity, to provide development finance to SME housebuilders. 

“However, it is very exciting to now see regulated specialist development finance lenders who have demonstrated that they can and must be part of the solution if we are serious about tackling the UK’s housing crisis.

“Ultimately, tackling the UK’s housing crisis requires a coherent overarching lending strategy so that funding can be unlocked to allow to build the homes the country needs. 

“Regulated specialist development finance lenders, through partnerships with LDS and products that effectively de-risk the exit for SME housebuilders, must be brought into the fold to help tackle the housing crisis.”

Shahil Kotecha, CEO at Pivot, stated: “Savills’ research report on the size of the housebuilder market identifies three key factors contributing to a dwindling population of SME developers: availability of land; access to finance; and supply chain confidence. 

“While the GFC has impacted lender attitudes and availability of development finance from traditional lenders, there has at the same time been a large increase in the availability of real estate debt finance from the non-bank lending sector, which in turn is alleviating some of this pressure. 

“However, as correctly identified by the report, the ability to not only obtain this finance but to attain it with competitive terms is crucial to the expansion of SMEs.” 

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