11 Jul Supporting early-stage developers – it’s the right thing to do
A 2016 study by Tom Archer and Ian Cole from Sheffield Hallam University found that the top 10 housebuilders increased their share of housing production from 9% to 47% between 1960 and 2015. In 1980, there were over 10,000 SME housebuilders building 57% of all housing.
Fast forward to 2014 and this number sits at just 2,800 SME housebuilders, delivering only 27% of completions. Over the last 40 years, the number of completions annually has fallen consistently to the point where we are now faced with a housebuilding crisis of significant proportions.
Volume housebuilders ultimately report to their shareholders and cannot be expected to deliver housing indiscriminately, especially with the cost, risk and investment required for each site. These housebuilders are correct, in principle, in maximising profitability from each site they develop, including (occasionally) land banking. However, a lack of competitive force within the sector in the delivery of all types of sites ultimately limits completions. Increasing the number of players at all levels is essential.
Access to larger sites, particularly on public land in London, can also be dominated by volume housebuilders. Small – and medium – sized developers are often unable to tender, bid to promote or develop on these sites. Accordingly, this ties up the larger sites in the hands of developers who can land bank and control supply to suit their means.
There also remains a skills shortage in the housebuilding industry. With a more diverse selection of developers offering work, contractors and subcontractors would be more confident in offering apprenticeships to young trainees. With housing completions dominated by a narrow group of builders, this potentially leaves tradesmen exposed in a downturn with fewer alternative sources of business and, as a result, they are less keen to take on the overhead of a young apprentice.
Smaller developers within the property sector face different dynamics to volume players. These housebuilders work hard to create a strong team of tradesmen, land directors and support staff. The only way to keep these individuals within the business is for an SME developer to keep developing, regardless of market conditions. Accordingly, an increase in the number of SME developers will lead to an increase in housing completions as a consequence.
However, starting a housebuilding business is difficult in its early stages, often due to capital constraints. Even shrewd housebuilders face funding challenges, no matter how well sites can be purchased. Despite a plethora of mainstream development finance options being available, all require a substantial tranche of equity, something many early-stage housebuilders cannot access.
Furthermore, accessing senior development finance is not easy for inexperienced or new housebuilders. Clearing banks and most challenger banks are not viable options in the current market. Some lenders, like ourselves at Avamore Capital, are picking up the mantle and we have begun to create products and specialise in programs for ‘newbie’ developers.
As a consequence we are creating a reputation for delivering bespoke development finance solutions on small schemes and conversions, especially for early-stage players. Avamore has even looked at providing guidance to customers by matching them with contractors, development managers and other professionals. This ‘finance as a service’ approach is all about generating positive outcomes for our customers and contacts. In the long run, this approach will have positive benefits for the housebuilding industry and the economy as a whole.
Those of us in the finance sector need to be innovative and broad-minded when it comes to early-stage developers. By doing so, we may just enable the volume developers of tomorrow to build the homes that we desperately need today.