Supporting SME housebuilders in challenging times with United Trust Bank

Supporting SME housebuilders in challenging times with United Trust Bank

New LDS Strategic Advisor Gordon More discusses two key challenges for SME housebuilders right now ‘Sales Risk’ and ‘Net Zero’ with United Trust Bank.

As United Trust Bank’s latest ‘Wise Owl‘ Gordon shared his insight on both topics and how we can support SME housebuilders in these challenging times.

Gordon has spent more than 30 years in real estate finance, working at senior executive level in public and private sectors. In 2014 he joined Homes England from Lloyds, where he was managing director for Commercial Real Estate. He became Chief Investment Officer at Homes England in 2017, leading a team responsible for the deployment of billions of pounds in support of the Government’s housing strategy, before being appointed Interim Chief Executive in 2021.

Gordon has a portfolio of Non-Executive Directorships including roles at Sigma Capital, Allison Homes and Kingswood Homes. He recently joined LDS Sales Guarantees as Strategic Adviser and Investment Committee Chair.

While the Government’s housing narrative now focusses on regeneration and levelling up (having quietly dropped the commitment to a million – 300,000 pa – new homes over the parliament) the shortfall of new and, importantly, affordable housing continues to increase.

I feel a bit like gamekeeper turned poacher with my move from banking, and latterly Homes England, to seeing things from the housebuilder lens following recent non-executive appointments at SME housebuilders, Kingswood Homes and Allison Homes.

While I was prepared for challenges as the sector emerges from the Covid pandemic, the reality was stark. Shortages of bricks, windows – stairs! – and the inability to agree prices on numerous key supply products out more than 8 weeks were just some of the issues being faced. Six months on, it is inflation, increasing mortgage rates, the nutrient issue – with Natural England/DEFRA effectively freezing large areas of England to new housebuilding until a mitigating solution is agreed – and, of course, the phasing out of Help to Buy. It is not for the faint hearted. Two emerging areas of challenge for SMEs are sales risk and the need to decarbonise.

 

Sales risk

If market commentators are to be believed, despite the continuing supply/demand imbalance, selling new homes may be about to become harder and take longer. The institutional private rented sector and shared ownership are alternative tenures which can allow housebuilders to forward sell and hedge against a slowdown in market sales. While this may have a valuation impact overall, it aids cash flow and helpfully provides lenders with greater certainty of revenues.

Some larger housebuilders already accommodate a partnership or mixed tenure approach on larger sites, supported by the “wall” of pension and life funds looking for yield and stable income streams. Though the focus is currently on larger sites with 50+ homes, as demand increases there may be more opportunity for smaller housebuilders on smaller sites. Another option for de-risking sites is the Sales Guarantee – an innovative instrument I am now looking at with LDS, which contracts to purchase any completed and unsold homes on a site, while also releasing a 10% deposit into cashflow.

 

De-carbonisation

The Government, through the Future Homes Standard, is now phasing in several requirements for new homes to reduce carbon emissions – including Part L (Fuel and power), Part F (Ventilation), Part O (overheating) and Part S (Electric Vehicle Charging).

This brings an immediate need for SMEs to research and identify solutions (air or ground source heat pumps and/or with solar with electric central heating systems instead of gas boilers). These are big and expensive choices, especially without an established supply chain and infrastructure to support.

Homes manufactured offsite (panelised and/or volumetric) offer a potential solution, as they can be more easily adapted to meet stricter carbon reduction targets, although pivoting construction techniques requires an even bigger step into the unknown and can be more challenging without a certain amount of scale.

A dependable supply chain is key, and this will iterate over the coming months as housebuilders focus on the best solutions and consumers become more demanding around the quality of product that they will buy.

 

How can the development finance market help?

Whilst development finance currently remains widely available, history shows that when liquidity does contract, smaller housebuilders suffer most. Stability is key, and it is good to see an increasing willingness for more patient institutional capital to participate in development debt.

In general, lenders should take a more flexible approach to encourage and support their borrowers to build more. For example, where schemes are de-risked (either through a mixed tenure structure or the scheme being pre-sold) lenders’ credit profiles are improved – so how are terms reflecting this? Similarly, are multiple sets of financial covenants really needed and, if so, where should they be set?

Finally, how do funders genuinely support the need to de-carbonise – are small discounts for improved operational energy efficiency good enough? How about embodied carbon? And could the funding market help educate SMEs on how to build better and where to go for advice/supplies?

Covered on United Trust Bank’s website.

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