Can new finance options give UK’s residential sector a shot in the arm?

Is additional finance for developers enough to coax more players back into the market?

October 04, 2018

As the UK continues to grapple with a shortage of housing across all tenures, additional finance for developers may galvanise the residential sector.

The question is: Is it enough to coax more players back into the market?

The UK government and one of the country’s biggest investment banks, Barclays, recently announced an initiative to lend a total of £1 billion of development finance to house-builders. UK residential developers will have access to loans ranging from £5 million to £100 million through the newly created Housing Delivery Fund.

According to Nick Whitten from the firm’s UK Residential Research team, the move is “a welcome start.”

But while a drive to stimulate investment in the UK residential sector is a necessary step to help boost housing levels, more will need to be done to make up the country’s shortfall in supply, estimated to be some 100,000 units a year below the required level of 300,000, according to data from JLL.

Smaller players in sight

Almost two-thirds of homes are currently built by just 10 companies, according to the UK government, which now has smaller developers in its sights as it looks to stimulate more housebuilding. A key objective of the government’s initiative is to diversify the UK’s housing development market and drive growth among a dwindling number of small and mid-scale builders.

Whitten points to a significant fall in the overall supply coming from small and medium-sized developers, who represented 28 percent and 40 percent of housebuilding in 2008. Today, those figures have plummeted to 12 percent and to 29 percent respectively.

“It was really the small to medium sized builders who fell away in the aftermath of the global financial crisis; a decade on and we need them back,” Whitten says. “Supply right now is dominated by the large-scale, listed developer – which doesn’t make for enough variety. Diversifying delivery is a major requirement if the UK is to get the types of homes it needs.”

For smaller house-builders, a fresh injection of capital should, says Whitten, help go some way towards diversifying the type of property being built. “Development styles in UK housing do not vary greatly but a more unique, different product could emerge.”

Projects such as the custom-built Graven Hill scheme in Oxfordshire town of Cherwell, where 187 hectares of land were bought by the council, have seen a mix of smaller developers as well as individual buyers take plots. The council allocated up to £2.5 million in development finance to assist self-builders in the construction of their new homes. A “mix-and-match” approach has resulted in a less identikit outcome.

Regardless of style, getting the job done is another issue – and one lasting legacy of the 2008 recession is a lack of skilled-labour in the UK’s construction sector.

“A lot of that talent was lost, with people retraining for other careers – many couldn’t afford to wait for the residential development market to return,” says Whitten. “Re-incentivising new entrants at the smaller end of the scale, and training the next generation of builders, could be intelligent ways to use new funds.”

The encouragement of new entrepreneurs, as well as closer relationships with the UK’s national construction school in Norfolk, would also be beneficial, says Whitten.

Different types of tenure

Theresa May recently pledged £2 billion for housing associations in a bid to provide more affordable homes. The new fund will support developers who can deliver homes for rent or for sale – including social housing and retirement living as well as the country’s private rented sector – a sector proving increasingly popular with institutional investors. Different types of tenure, and residential developers who can build across the full range, are needed, says Whitten.

“The UK has, for example, an aging population and using new initiatives – like smaller, community-focused schemes – for such tenures would go some way to addressing the shortfalls in that particular part of the market,” he says.

New funding, as Whitten concludes, is always welcome in a sector playing catch up.

“Fresh sources of finance – but accompanied by new ways of housebuilding – are much-needed,” he says.

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