SME housebuilding sector faces strong future

We are living through a fascinating period politically in the UK and one that is causing significant uncertainty across our economy.

This uncertainty is being felt in industries up and down the country and appears to have had a reasonably significant dampening effect on UK growth, with soft business investment numbers contributing to a significant slowdown in activity growth towards the end of 2018 and into early 2019.

Set against this, unemployment remains low, real wage growth was strong going into the end of 2018 and day-to-day consumer activity appears to be remaining relatively buoyant.

Writing anything about the SME development sector against this background could feel like a significant risk as the next few weeks will almost necessarily herald a change in outlook.

Are we heading for a hard Brexit? Or a soft Brexit with a fudge to make the backstop palatable? Or no immediate Brexit at all? And how does all of this feed into the development finance market for the SME sector?
However, particularly in the face of current political uncertainty, when thinking about the SME sector, it remains important to look at the challenge that housebuilders are taking on over a medium-term horizon and to think about longer-term changes to the environment in which we are operating.

Housing remains structurally undersupplied in the UK after decades of inadequate build rates, growth in new-build numbers have not hit government targets for a variety of reasons and significant growth in output is still needed. This is recognised by government and a number of policy initiatives are in place to support housebuilding.

These initiatives range from changes to the planning rules to support land availability to government support with funding for SMEs — via players such as the Housing Growth Partnership, with whom we have worked — to Help to Buy to ensure buyers have access to capital to buy houses.
On top of this, my strong view remains that — again over a medium-term horizon — financing conditions for the SME housebuilding sector will continue to normalise.

Competition between well capitalised alternative lenders and challenger banks is driving down spreads after they ballooned in the wake of the financial crisis.

Mortgage costs also remain low by historical standards — driven by continued low interest rates — and a strong performance for employment and wages, after a long period of weakness, will aid affordability.

Given these longer-term trends, the SME sector should be confident that it faces a strong future. With land availability continuing to improve, housebuilding numbers will increase over the coming years and SMEs are well placed to play a large part in that increase in supply.
There will remain challenges. House price growth appears likely to be muted, competition is going to increase as build volumes grow and land owners remain wary of poorly capitalised SMEs.

But SMEs can and will rise to these challenges. Ambitious businesses are harnessing the improvements in capital availability to become well-funded, reliable counterparties with the ability to make decisions quickly.

Improving land availability is giving us the opportunity to increase build volumes. And a focus on delivering better-designed homes with more generous light-filled spaces is giving us a competitive edge in the sales arena against identikit stock from larger builders.

The immediate outlook may feel uncertain, but the challenges we are taking on are structural and long term and the environment in which we are operating is improving on a number of fronts. There is a significant prize out there for SME housebuilders who can increase their scale and deliver high-quality housing stock on reasonable margins — and it is a prize well worth focusing on.

This article first appeared in Development Finance Today.

Back to news