“Reaching the ambitious target of 1.5 million new homes will take more than just reforming the planning system and reasserting how committed the government is to construction”
– Paresh Raja – Market Financial Solutions
The UK has been battling with a housing crisis for many years, with demand far outstripping supply in most parts of the country. In fact, according to a report from June this year, England alone is short of 2.5 million homes – put another way, 550,000 new homes need to built each year over the coming five years to bridge the gap, which will take a great deal of investment from both the private and public sectors.
The crisis was recognised by Labour during the election campaign, so it is no surprise that the party has placed housebuilding high on its agenda since coming to power. Indeed, the new Housing Minister, Angela Rayner, has been keen to stress that the new government is on a mission to ‘get Britain building’.
What does that mean in practical terms? And what needs to be done to realise this goal?
Some barriers to housebuilding are being brought down
As part of this mission, the Labour Party has set out reforms to the planning system as they vowed to be ‘builders, not blockers’.
Under these reforms, 300 new planners are being hired to accelerate the planning process, while the government will also open up areas of the green belt with poor quality land, known as the ‘grey belt’, to allow councils to more easily approve developments in these locations.
Collectively, these measures are geared towards building 1.5 million new homes by 2030. This will be supported by the return of mandatory housebuilding targets for local councils, which were abolished under Rishi Sunak amidst pressure from his own back benches.
But reaching the ambitious target of 1.5 million new homes will take more than just reforming the planning system and reasserting how committed the government is to construction.
Someone has to actually build the properties, which will require a great deal of input from the private sector, particularly developers. However, developers will delay breaking ground on new projects if they are unsure as to whether the homes they build will sell. For example, data from last year shows that restricted mortgage availability is the second largest barrier stopping small house builders from delivering new supply.
Developers need to know they will be able to sell
It is important, therefore, that developers are given the confidence that if they do build in greater numbers, the buyers will be waiting to snap up the end product – and this is where the specialist finance sector can play a role.
By providing loans to buyers who are underserved by the mainstream lending markets – such as international investors or buyers with complex financial backgrounds – specialist lenders can broaden the pool of potential homebuyers. This can then encourage increased buyer activity, boosting market confidence and assuring developers that they are likely to see a return on their investment upon completion.
In turn, this could ignite further construction and, ultimately, help to address the housing crisis.
Avoiding extension fees and releasing capital
Specialist lenders can help in another way. Namely, they can provide developers with breathing space to complete developments without needing to sell off individual units at a reduced price in order to meet a repayment deadline.
Development exit loans are typically used to repay the original loan that a developer receives to finance a housing project. By allowing that original financing to be repaid without penalties or fees being incurred, development exit loans provide more time for projects to be completed. This ensures that developers get full value for their initial investment, and many lenders allow developers to pay their loans back in instalments as each property is sold.
Alternatively, even if a project isn’t facing a delay, lenders can deliver loans to help developers release capital from a current project. This capital can then be used to finance a new project, avoiding any delays that may occur from waiting for units to sell. Obviously, this is a particularly useful way of using development exit finance to turbo-charge housebuilding.
Getting projects over the line
Of course, another common issue is that developers run out of money partway through construction. This has become more common amid rising material and labour costs. In fact, according to data from the Federation of Master Builders (FMB), 42% of small housebuilders are held back by a lack of access to finance.
More often than not, whether it’s due to external changes in the economy or supply chain issues resulting in material shortages, developments frequently get delayed, postponing the much-needed cooling effect that new developments can have on local housing markets.
Fortunately, this problem has been acknowledged by the government, which is why Chancellor Rachel Reeves promptly identified four sites across England that would be reactivated to boost housing supply by 14,000 homes when Labour came into power. And it’s another area in which specialist finance can be instrumental in driving up the number of houses being built in the UK.
For projects that stall midway, for example, development exit loans can again be used to bridge the gap between the completion of a project, securing a long-term financial product, or the sale of the units that are built. They can also be used to avoid extension fees on a developer’s initial loan, protecting profit margins.
Ultimately, it is crucial that housebuilding becomes, and remains, a more attractive endeavour for developers if we are to effectively address the housing crisis. Developers are the ones who will ultimately build the homes, so they must be equipped with the necessary tools and confidence to do so. Reforming the planning system is not enough.
Development exit finance can play a pivotal role in this, and specialist lenders must recommit to offering a flexible approach to lending if they wish to contribute to a more equitable housing market.