Why does the UK housing sector need alternative investment?

By Jo Bentham28th April 2021

In the UK, demand for housing has long been outstripping supply. And as the post-Coronavirus lockdown housing market boom continues, the discussion around reversing the decline of small and medium-sized housebuilders in order to aid in tackling the ongoing housing crisis has been reignited.

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Whilst the current Government set an annual house building target of 300,000 new homes per year by the mid-2020s, estimates suggest around 345,000 new homes are required each year when considering the backlog of existing need for suitable housing.

Read more:COVID-19 and working from home: the effect on the residential property market

Between 2019 and 2020, official statistics show 243,770 homes were delivered. These are a mix of new-build homes – which account for 90% of those delivered – communal dwellings and homes made available via the Government’s change of use reforms. 

Though these numbers are positive, with the amount of homes supplied increasing for the seventh consecutive year, they are simply not enough. 

The gap between supply and demand in the UK continues to widen. And as Rightmove reported a record-breaking 9.3 million visits on 7th April 2021, with house-hunters spending over a staggering two billion minutes searching the site in March 2021, it is evident that demand is continuing to surge.

The performance of the housing market is excellent news for the UK’s post-pandemic economic recovery – as highlighted back in July 2020, when the Chancellor of the Exchequer stated that “one of the most important sectors for job creation is housing” when reiterating the market’s impact on driving economic growth.

And to do their utmost to supply the demand, small and medium-sized housebuilders must re-establish themselves in the market – and to do so, alternative investment is crucial.

 

The decline of small and medium-sized housebuilders

According to a study by the Home Builders Federation (HBF), more than 12,000 SME housebuilders built 40% of new homes in 1988. Now, this number has dwindled to around 2,500 SME housebuilders, responsible for just 12% of new-build housing. 

In the aftermath of the 2007/08 financial crisis, access to funding for small and medium-sized housebuilders diminished. As a result, in the period between 2007 and 2009, one-third of these SME housebuilders ceased building homes – a major blow when the UK was already struggling to keep pace with housing demand. 

The cause of this reduction in available finance was down, in part, to changing business models for the mainstream banks. Huge cuts as a result of the financial crash meant that departments focused on this sector were wiped out and lending to SMEs – not just SME housebuilders – took a backseat. The introduction of Basel III – which focused on ensuring banks maintained proper leverage ratios and kept certain levels of reserve capital available – exacerbated this. Whilst Basel III was needed, it caused many banks to restrict their lending to things that appeared to be practically guaranteed. 

As a result, regional small and medium-sized housebuilders who are able to help provide a richness of housing – utilising brownfield land to enhance communities and building the right houses in the right places at the right times owing to their in-depth knowledge of their respective areas – have become far less common. This is not just detrimental to fixing the UK’s somewhat broken housing market, but also has a substantial economic impact. 

 

An opportunity for private investors

In a Government white paper released in August 2020, which explores some of the core  barriers and potential solutions when looking to increase housing supply in England, an emphasis was placed on encouraging small and medium-sized housebuilders back into the market. 

But even with specialist banks aiming to fill the funding gap left by mainstream banks, there is still a significant lack of capital available. 

However, this results in valuable opportunities for private investors to be instrumental in supporting SME housebuilders with their focus on delivering much-needed housing and be a driver of economic growth. 

Through alternative investments such as property bonds, experienced investors can help to fund entire housing developments whilst targeting potential returns of up to 8%. In addition, some property bonds can be held within an Innovative Finance ISA (IFISA), allowing investors to benefit from the tax-free ISA wrapper.

But for many investors, financial returns are no longer the sole consideration when choosing where to invest. More and more, it’s important to investors that their investment decisions have a positive societal, economic or environmental impact. 

Read more:how experienced investors can invest for impact with property via the IFISA

And it’s clear to see how providing alternative finance to small and medium-sized housebuilders is an example of investing for impact. Not only are investors playing a role in the delivery of housing amidst a chronic shortage, they are also supporting the growth of the housing market; a market whereby home-movers contribute an estimated £12 billion to the economy each year and house building alone supports almost 750,000 jobs. 

 

Supporting the UK housing sector with alternative investment

The significance of small and medium-sized housebuilders within the housing sector should not be underestimated. It is evident that addressing the undersupply of housing in the UK must be a joint effort between national housebuilders and their regional counterparts.

However, a notable lack of funding is a barrier for SME builders who otherwise have the knowledge, skills and expertise to provide high quality new homes at a time when the UK needs them most. 

This is where alternative investment and experienced private investors are critical. On top of the obvious potential financial benefits for the investor, the alternative finance provided is instrumental in delivering much-needed housing and the numerous economic benefits that accompany it.