Inspired by the government’s recent housing white paper, we decided to take a closer look at Small and Medium Enterprise (SME) housebuilders. Delph’s Mind the Funding Gap considers the decline of SME housebuilders activity and market share in the UK construction industry.
The paper investigates how access to finance has become more challenging across the economy for SMEs since the onset of the recession and how, consequently, the percentage of homes built by SMEs has more than halved from 2007 to 2017.
Funding challenges, from bank loans with unreasonable fees and interest rate charges to not being able to secure finance, can be avoided by working with partners that provide alternative models of funding.
Click here to download the full report now.
Mind the Funding Gap’s five takeaways:
1. The recession
In the late 1980s, SMEs were responsible for most of the UK housebuilding. This fell to less than 50% by 2008.
Since 2007, the number of housebuilders delivering 30 or fewer homes has more than halved in 2017; from 5,156 to 2,244. The financial crisis was a pivotal moment for the construction industry and many SME housebuilders found they simply could not weather the storm.
2. SMEs are losing market share to the major housebuilders
Competition for land is an issue that is often cited to explain why SMEs have struggled and continue to lose. 67% of SME housebuilders in England consider a “lack of available land” to be their biggest problem.
Conversely, large housebuilders are sitting on over 600,000 plots of land – enough to build up to one million new homes in the UK. Market share of the largest five housebuilders has increased significantly since the period of austerity, which followed the start of the 2008 recession.
3. There is a financial catch 22 for SMEs
The untenable conditions of bank loans mean that SME developers face the impossible choice between looking for funding from other sources, or accepting a loan on terms they are uncertain they will be able to fulfill; either action could potentially result in their business grinding to a halt.
4. Late payment is a major problem in the construction industry
Discoveries from the SME Confidence Tracker report for Q2 of 2016 show that in the year between August 2015 and August 2016, the construction sector was one of the worst hit for having to write off debt due to late payment, which can occur due to insolvency, default or dispute, cancelling £15,000 on average over the year.
5. Ways that SMEs can overcome the housing crisis obstacles
Delph has long believed that SMEs are an engine for growth. We work with SME builders and developers by offering the following alternative funding models:
- Off Plan
Builders and developers can secure a large deposit and a guaranteed exit route by selling off plan. This helps cash flow and can also enable better funding terms with banks. It also cuts out sales risk and future marketing costs.
- Pre-Purchase Partnership
This arrangement gives the opportunity for a housebuilder to bid on a scheme knowing it has a guaranteed sale price agreed with an investor or partner prior to their offering a submission. This removes the risk of late payment so that once everything is completed, the housebuilder can proceed quickly to their next project.
- Forward Funding
Under this model, an investor can buy the land and fund construction on stage payments or interim valuations. This approach allows an SME builder to clear the balance sheet, eliminate risks, and make large savings on marketing, sales, and finance charges.
There is now widespread acceptance that the SME construction firms have an important role to play in helping the UK meet the housing challenge. However, if we do not close the funding gap, the sector will fail to live up to its promise.
Click here to download Delph’s Mind the Funding Gap white paper and read the full report.