Since the 2007 financial crisis, the finance and housing markets have undergone a period of volatility. The pre-crash boom in house prices, which led to an expansion in the availability of lending and financing, was quickly reversed, with lending to finance property development viewed as high risk and ‘speculative’ by risk-averse building societies and banks.
The Decline of Major Bank Lending
Large banks and building societies once supplied the majority of the finance required for UK housebuilding. However, banks and building societies became much more cautious post-crash and began deleveraging, and new rules were introduced requiring banks to maintain higher levels of capital. These new capital adequacy requirements meant that housing development finance became too expensive to lend, and mortgage offers became increasingly restrictive. Per figure 1 below, between April 2014 and April 2016, loans to property developers halved from £32.5bn to just £14.9bn.
(source: Citywire, June 2013).
Figure 1: Loans to Property Developers between April 2014 - April 2016
The Disparity between Lending to Small and Medium Projects
In the short term, insurance companies stepped in to supply funding, and are now responsible for lending around 10% of property development finance. However, because many insurance companies have minimum investment sizes, they only allocate funds to large developments.
As a result of this new lending environment, landowners and developers who wished to fund a project by borrowing finance secured against existing property or land, found it increasingly difficult to do so. This resulted in a limited amount of new housing stock built post-2007.
The Need for New Housing
As the availability of mortgage credit was reduced, the UK housing crisis was developing at pace. In 2004, the Labour government’s Barker Review reported that each year, 240,000 new properties would need to be built to meet demand, and maintain prices at an affordable level. However, in 2016, just 153,370 new properties were completed. Although this is a 5% increase in the previous year’s results, the shortfall is continuing to drive up the cost of land and existing housing stock, particularly in the South East.
Figure 2: Barker Review Targets Vs Actual Housebuilding Volumes
The Development of Innovative Financing
In response to the reduced availability of mortgage lending from banks, over the past few years, innovative new approaches have been used, to ensure that developers and landowners can secure the financing they require to complete building and refurbishment projects. Non-traditional lenders, who are not burdened by the capital constraints faced by their traditional counterparts, are filling the gap created at the lower end of the market. They supply a suite of different loan products which meet the needs of small landowners and property developers, who are least well served by traditional banks and building societies.
Innovative finance now accounts for over 14% of all property development loans, helping to maintain a fair, open and competitive housing market in the UK. Property developers who act as landlords can use property or land which they already own to secure further lending. Using the equity in their portfolio allows them to unlock finance so they can build or purchase more property, and grow their portfolio without the need for liquid cash. Responsible financial innovations are the only way of kick-starting the distressed UK property and housing market, leading to greater efficiency and increasing the availability of housing to millions of people.