Notwithstanding the immediate challenges facing the housing market, notably the UK’s impending withdrawal from the European Union and the questions this poses, there is one underlying issue that demands urgent attention. By this, I am indeed referring to the housing crisis.
Make no mistake, the government has made positive efforts to address the current imbalance between supply and demand, from setting ambitious housebuilding targets to most recently launching a scheme to fund developers. Titled the ENABLE programme, this scheme was revealed earlier in the year by the British Business Bank, and will make available up to £1 billion of guarantee support for smaller housebuilders via specialist and high street banks.
This is a good start, but further creative commitments like this need to be made to address the pressing task at hand: building enough suitable housing to meet the needs of the population.
Where do we stand with the housing crisis?
The chronic undersupply of housing across the UK means that there’s a tall order to fill for developers working to restore balance. Estimates have put the number of new homes needed in England at between 240,000 and 340,000, accounting for new household formation and a backlog of existing need for suitable housing. At 220,000, the number of houses added to the market in 2017/18 falls short of this target.
SME housebuilders are central to solving the housing crisis, and supporting their efforts must be at the heart of the government’s long-term strategy to provide enough suitable accommodation. However, while their role in contributing to new-build developments is fundamental to any solution addressing housing supply, small property developers have been declining in numbers. According to a report by the Home Builders Federation, in 1988 small housebuilders were responsible for 4 in 10 new build homes. Today, this figure has dropped to just 12%.
In essence, address the imbalance between supply and demand can only be achieved alongside reforms that resolve the barriers preventing SME developers from reaching their full output potential. I fundamentally believe that progress cannot be made until we restore the confidence of SME housebuilders.
Access to finance
Chief amongst the barriers standing in the way of SME developers taking on new projects and delivering new-builds is access to finance. In fact, a recent survey revealed that over half (57%) of small developers identified this as the biggest obstacle they currently face.
This will come as little surprise, particularly if we are to reflect on the industry-wide shift in the culture of lending since the 2008 financial crisis. Since this time, traditional lenders have become more risk averse, employing more restrictive lending criteria which has ultimately made it much more difficult for smaller developers to access the funding they need.
The avenues for finance have narrowed for SME businesses, which has meant that many take on much greater risk when starting a project. Most SMEs building fewer than 100-150 homes per year are now currently reliant on project finance, which is agreed on a site-by-site basis. Besides being inefficient for both parties – the lender and the borrower – this also involves significant additional fees for entry, exit and legal agreements.
How tax-efficient schemes can support developers
Bricks and mortar remains a popular asset for investors, and with new-build developments underway in rising urban centres, particularly in the north, the need to construct residential and commercial properties is a top priority. Creative thinking is needed, and to offer better financial support, this is where I see tax-efficient investment schemes coming into play.
The Enterprise Investment Scheme (EIS), for instance, offers a story of success. Created by the UK Government to encourage private investment into startups and early-stage businesses through tax incentives, this initiative has played a vital role in helping Britain’s startups. Since the scheme was launched in the 1993/94, nearly 30,000 companies have received investment and over £20 billion worth of funds have been raised.
What if such a scheme could be implemented in the property sector? At present, initiatives like this currently preclude SME housebuilders from access to investment incentives, however the potential on offer is clear. Incentivising private investors to direct a proportion of their capital to SME developers through tax incentives would widen the pool of finance available to developers and help them to get projects of the ground.
Such tax schemes should be considered carefully by the government, particularly at a time when demand for housing is growing. That’s why I believe creative solutions that link private investors with property developers promises to bolster national housebuilding efforts, support UK businesses and ensure we can meet the country’s future housing demands.
Jamie Johnson, pictured, CEO and Founder, FJP Investment