Steve Larkin, Director of Development Finance, explains why small- and medium-sized developers need more help. This article originally appeared on Specialist Lending Solutions.
The world of development finance has changed a lot over the last decade.
Back in 2008, banks and building societies were the dominant forces when it came to funding development projects, supplying almost three quarters of lending (72%) according to CBRE.
That’s no longer the case. The banks are subject to far more stringent liquidity rules since the credit crunch, which limits what they can offer. The memories of the crisis have also led to a more conservative approach.
These days traditional high street banks and building societies have a much more limited ability and appetite to lend to many small-scale developers. Again according to the CBRE, while the overall availability of development finance has grown, it is only the most “desirable” schemes that are benefitting. In other words, the larger, more established developers with the biggest projects and higher margins, coupled with additional balance sheet security and unit pre-sales.
The market share of banks and building societies has evaporated, falling from 72% to 39% at the end of 2014.
But the desire from developers, particularly those at the sub-£10m end of the market, is still strong. Fewer small-scale development projects fall within the strict bounds of what a traditional high-street bank wants before it will lend.
Nonetheless, we need those projects to go ahead – we simply aren’t building anywhere near enough houses. In 2015, just 143,000 homes were completed. At this rate we won’t come close to hitting the government’s target of one million new homes by 2020.
This is where alternative lenders can step in and work with SMEs, offering a quality service, competitive pricing and fast access to funds. Alternative lenders already account for 14% of all development loans, a figure which simply has to grow.
Excitingly, LendInvest has seen lots of interest from outside London. For example, back in March we completed a project in Nottingham with Crosslane Residential Developments which saw a five-story, 16,000 sq ft office block converted into 23 one and two-bedroom apartments in the city centre. It was the largest office-to-residential conversion in Nottingham in many years, with around 60% of the units sold before completion.
It’s a textbook example of the sort of exciting project that can help tackle the housing shortage, but which many traditional high street lenders can find more challenging to support.
Finance isn’t the only challenge these developers face though. Access to land is still difficult, though the government is at least taking steps to address this. It has talked strongly about freeing the planning shackles, and has also announced that up to 10,000 new properties – both residential and commercial – will be developed on sites around railway stations in the coming years.
It is important that small-to-mid-sized developers benefit from this release, allowing them to share in the potential to deliver their own individual product and enhance their market reputation at the same time.
There is also a skills shortage in construction. As a report from the Chartered Institute of Builders said last year: “The skills shortage facing construction is compounded by those entering the industry not being suitably qualified for the job, which can create ‘hard-to-fill’ vacancies.”
Nonetheless, the developers we speak to every day are full of energy and ideas. The desire to build is there. We just need to do more to help the developers get their projects moving.