The rise in new lenders offering development finance is providing welcome news for SME developers. This will likely boost housebuilding and the delivery of new-builds in the coming years.
Development finance is a short-term loan for residential property construction or refurbishment projects with the money released in phases. Developers can’t build, build, build if they don’t have the finance to do so.
In the past five years, the number of lenders offering development finance has increased by 52%, according to research from specialist mortgage broker Mortgages for Business. Nearly 40 lenders have either started to offer development finance or have come to the sector for the first time.
The increase in lenders is showing how competitive the development finance market is becoming. This is leading to better criteria and competitive deals for SME developers. Previously, the market was full of big bank lenders.
Now, non-bank lenders without as much of a track record are leading the way. This is making it slightly more challenging to access the available loans, but a specialist mortgage broker can help housebuilders find the right lender and deal.
Housebuilding sector set to benefit
This rise in development finance options will likely provide a boost to the housebuilding sector. Across the UK, SME developers are on track to build 70,000 homes a year in the coming decade. The increase in finance options could lead to a golden era of housebuilding and could help SME developers triple the number of new homes they build.
Paul Keddy, head of the specialist development finance desk at Mortgages for Business, says: “The increased competition means lenders battle it out to top the tables, meaning developers are being offered increasingly competitive deals. That is set to have a direct effect on the number of new homes built in the next year or two – it will turbo-charge SME housebuilding.”
In the 1980s, small developers were responsible for 40% of new homes in the UK. Today, this figure is only 12%. Lack of funding for SME builders has been one of the biggest challenges holding projects back. Over the past decade, availability and terms of financing for residential developments have become particularly difficult for small housebuilders.
In the year 1988/89, SME developers started work on approximately 88,000 residential properties across England. On the other hand, in 2019/20, small housebuilders started on only 17,000 dwellings.
More new-build homes needed
With the undersupply of housing, SME developers can play an important role in adding to the UK’s housing stock. Many in the industry consider small developments an efficient way to deliver new homes.
Paul Keddy comments: “Encouragingly the majority of these new lenders are for developers with relatively smaller deposits – companies looking to build six properties on a patch of land, rather than hundreds.”
Finally, small housebuilders have access to the funding they need. And we could see a new golden age of SME housing development in the years to come, which will bring forward more much-needed new-build homes.