Lending market for SME housebuilders stayed robust in 2020

April 16th, 2021

Lending market for SME housebuilders stayed robust in 2020 despite Covid-19 uncertainty, new data reveals.

Lending to SME housebuilders held-up over the course of 2020 despite a mid-year freeze.

Challenger banks, debt funds, family offices and bridging lenders all returned to market at speed by the end of the year.

2020 bucks the trend seen following the Global Financial Crisis (GFC) when lenders retracted for a sustained period.

The lending market for SME housebuilders remained robust in 2020 despite the economic impact of Covid-19, research from real estate finance advisory LEXI Finance reveals.

The real estate finance market experienced a severe retraction during the first lockdown when the housing market was effectively shut. The second quarter in 2020, the period of most uncertainty in the funding market, saw lending fall off a cliff, dropping by 30 percent year on year. This represents a mammoth change in a market more used to measuring change in the low single digits.

However, despite the pause in Q2 2020, over 120 lenders resumed funding SME developers by the end of the year. By Q4 2020 activity had rebounded and overshot levels of funding seen in Q4 2019.

This reaction stands in sharp contrast to the response of the lending market following the GFC, with only 30 lenders remaining active in 2010. Comparatively, the financing market in 2020 contained four times as many development lenders. This is despite the economic impact of Covid 19, which has seen the UK suffer its largest drop in economic output in over 300 years, far worse than during the GFC.

This contrast will in part be due to the altered make-up of the lending landscape, which has changed dramatically over the last decade. The once-dominant high street banks have retrenched; now only funding the larger PLC housebuilders and projects requiring the lowest leverage. In their place, a range of alternative lenders like challenger banks, debt funds, family offices and peer-to-peer platforms – many of whom did not exist pre-GFC – have taken up the mantle and built-up sizable market share.

These new participants look at lending differently. They rely on a diverse array of funding lines and have varying approaches to risk. The market no longer relies on one pool of similar lenders and does not suffer from major disruption if a handful of participants pause. This post-GFC fragmentation, it appears, has created resilience.

The other major factor in the market’s post-Covid-outbreak strength is government assistance, which dwarfs the monetary response to the GFC. Last year we saw the Chancellor support property through stamp duty relief, interest payment holidays and more recently a return to 95% mortgages. On the lending side, we’ve seen support through CBILS loans and Bounce Back loans, all underwritten by the British Business Bank and guaranteed by the Exchequer.

This protection has dragged otherwise hesitant lenders back to the market and, most importantly, provided momentum as the country gets back on its feet. Although CBILS was launched in March 2020, its real impact in the market was seen Q4, when accredited lenders were most active in deploying loans. This has fed through into the data, which shows that 44% of all development finance loans were made in Q4 last year.

Sam Le Pard, co-founder at LEXI Finance, comments: “We’re still seeing the economic impact of the pandemic pan out. Whilst many lenders remain hesitant about certain types of commercial property, the market funding housebuilders is bullish. Partly this resilience stems from the fragmentation which occurred following 2008, but it has also clearly been driven by massive levels of government support. The development finance market may have needed a shot in the arm as much as the rest of the county, but now it’s back.

“Help for all corners of the lending market will remain invaluable if we are to meet the country’s need for new homes. Whilst the high-volume PLC housebuilders will continue to be supported by high street banks, it is the continued strength of the lenders supporting SME developers that will be crucial.”

Read the original article in Show House here.

Why the pandemic could spark a resurgence for SME housebuilders

April 13th, 2021

Sam Le Pard, co-founder of LEXI Finance looks at why the pandemic has caused a resurgence for SME housebuilders.

In the late 1980s, SME developers were building around four in 10 of all new homes. By 2016, these same firms were only developing 12 percent, with many wiped out by the Great Financial Crisis (GFC).

However, there are early signs that the pandemic could be the catalyst that sparks a resurgence for SME housebuilders.

Lockdown has meant many of us have spent the last year working from home. Whilst the death of the office is overplayed; many people will work from home post-pandemic far more regularly than they did pre-Covid.

Being locked down for prolonged periods has made people value space. And the truth is that young professionals are increasingly questioning the value of spending their hard-earned cash renting small city-centre apartments to be close to offices they will now spend less time in. Many are already voting with their feet.

For example, renters are leaving cities in favour of suburban and rural locations. Hampton’s reported that in September 2020, city renters dropped by 7% while demand for homes in the countryside rose by 4%.

This significantly increased stock levels in the city, with available homes rising by 29%, while levels of available homes outside cities were down by 48%.

SME developers are perfectly positioned to meet this changing demand. They are typically focused on delivering small to medium-sized residential development plots of up to 100 homes. These suburban and semi-rural sites do not make sense for the larger, listed housebuilders, creating a viable market for SMEs.

But the importance of a vibrant financing market to help SMEs deliver these homes cannot be overstated. According to 2019 research from the Federation of Master Builders, nearly four out of 10 SME developers said access to finance was a barrier.

This is changing.

A good example is our recent transaction with Blakesley Estates; an equity investment to support the construction of 32 private, eco-friendly and affordable homes in Devon, with a gross development value of £17 million.

Here, we partnered the regional housebuilder with a private investment consortium that took shares in the development vehicle. This will support Blakesley Estates’ plans to scale their activities and build 500 homes across the South West.

In contrast to the years after the GFC, credit has not dried up in the period since the outbreak of Covid. In fact, the retraction of High Street lenders experienced following the GFC, was filled by a great number of alternative real estate debt providers. This fragmentation has proved resilient and has been quick to recognise homebuyers’ desire for lifestyle changes.

Our expectation is that these trends supporting SME housebuilders will continue, and many more such schemes and developers will have access to debt and equity support at levels they have not enjoyed for years.

Hampshire, Dorset, and Devon are markets where we are already seeing significant activity fueled by people wanting green space. SME housebuilders may have had a tough few years’ post-GFC, but the next few years look set to be a return to the good times of the 1980s for the market.

Read the original article in Show House here.