"Britain hasn’t been building enough houses to keep pace with demand for decades – and the rate of new starts has been on a downward curve since the 1970s"
Housing issues often form a central tenet of political party policy; not just on the election campaign trail, but as cornerstones of Budgets and Autumn Statements, or pledges made by shadow ministers attempting to disturb the status quo.
However, while both Labour and the Conservative party referenced housing in their latest manifestos, it took something of a backseat in the election compared to topics such as social care, childcare and the NHS. As has often previously been the case, the extent of the housebuilding pledges has been to promise an impressively large number of new houses over a suitable vague period of time and hope nobody notices the muddled maths or the inevitable shortfall when it occurs. Now there’s the added complication of the DUP. They have pledged to turn Northern Ireland’s giant state landlord into a “strategic housing body” and build 8,000 social and affordable homes – but we can’t as yet know how their politics will influence the Conservative government.
But cutting to the chase, it’s still a pretty simple picture. Britain hasn’t been building enough houses to keep pace with demand for decades – and the rate of new starts has been on a downward curve since the 1970s; a few short-lived peaks aside. The basic facts of the matter are that there are not enough housebuilders left and those there are struggle to access the finance they need to start projects and see them through to completion. In the run-up to the global financial crisis there were 15 firms building more than 2,000 homes a year, yet by the following year just six of those remained. Smaller housebuilders found the going even tougher, with many citing banks’ reluctance to lend as the main sticking point.
Fast forward to 2017 and this financing logjam remains a serious issue. In the immediate aftermath of the credit crunch, the mortgage market endured a tough time with lenders who had been blamed for causing the economic downturn because of recklessly easy credit battening down the hatches and tightening criteria. It wasn’t just residential borrowers who suffered either, with business borrowers – including SME housebuilders – also receiving short shrift.
Recent research by trade body the Intermediary Mortgage Lenders Association found that three-fifths of lenders feel that more government support for SME housebuilders would help address the housing shortage. The findings also revealed that lenders view a high risk of builder default and lack of appetite for traditional debt finance as a key obstacle to increased development finance and that many builders are increasingly turning away from traditional models of debt due to a preference for mezzanine finance.
Yet despite helping to address the funding shortfalls that have emerged, mezzanine finance still remains relatively under the radar. It helps fill the funding gap between the equity developers have established and the amount of senior debt that banks are willing to provide and, as is often so important in the case of construction projects, decisions can be made quickly. Partnering with mezzanine lenders often allows developers to not only reduce the equity contribution required, but also enables them to spread the risk over multiple projects and considerably enhance the percentage return on equity invested.
The latest statistics from the Department of Communities and Local Government show that new home starts reached 43,270 in the first quarter of 2017, up 3% from Q4 2016 and 21% higher than the same period last year. While this is definitely a step in the right direction, it’s still relatively pedestrian progress given the Government’s previously stated target to build a million houses by the end of the decade. Mezzanine finance may not be an immediate panacea for curing the housing shortage, but it can certainly help get the cogs turning again, so the more developers know about it – and the more the government can do to help support the sector – the better.