Champion the small-scale developer

Traditional development finance must price in project and liquidity risk, but if your project is completed and you have begun selling units you could be eligible for cheaper funding, writes Matthew Tooth of Lendinvest.

A product which prices purely for liquidity risk is one way to help developers lower their costs. This type of product allows developers to switch over to cheaper, more flexible funding to tide them over until all their units are sold.

What’s more, if developers meet certain conditions, they may be able to retain part of the proceeds of every unit sale, which can then go towards marketing those remaining units or even go towards starting their next project.

Our development exit product is an example of how Lendinvest is trying to offer real, practical help to the nation’s small developers. It is no secret that small-scale developers are up against it – their numbers have dropped significantly in the last few decades. Back in 1988, the number of small builders – classed as those building 100 units or fewer a year – totalled 12,200. By 2014, that number had plummeted to 2,400.

This wouldn’t be an issue if the housebuilding behemoths were delivering the homes that the nation needs. But they demonstrably aren’t – the House of Lords believes we need to build 300,000 new homes every year in order to satisfy demand, yet last year we only managed 170,000.

If we are to increase the number of homes built in the UK, then we need to encourage new sources of homebuilding. That means doing more to help small and medium-sized builders.

Part of the problem here is the sharp lack of funding available. Following the credit crunch, traditional high-street lenders have been subject to much stricter liquidity rules which has led to a revaluation of the business lines they wish to support going forward. As a result they are less able, and in all honesty less inclined, to work with smaller developers.

In its Who Will Fund The Cranes? report last year, CBRE’s Andrew Antoniades pointed out that while the availability of development finance had improved over the preceding 12 months, “it is still highly selective and often only available for the most desirable schemes”. In other words, the larger, more established developers, with the biggest margins. The small-scale developers are too often on the outside looking in.

We launched a development finance team, focused entirely on small-scale developers, in December 2015 to try to address that funding gap. The popularity of the products so far says an awful lot about how sharply underserved developers were, and we will continue to look at other innovative products that can fill gaps in the market.

But finance isn’t the only problem developers face. If we want to see small developers succeed – and as a nation, we simply cannot continue to rely on the same housebuilding giants to get us out of this mess – then there are other issues which must be tackled too, such as access to land.

The Government is well aware of the problem – Sajid Javid, the communities secretary, referred to the “stranglehold on supply” enjoyed by the big developers and has pledged to tackle it.

But the time for talking is over. We need real, meaningful action if we are to turbocharge the UK’s small builders to deliver.