Funding Options Guest Blog: Lack of lending affects UK housebuilding

 

Lack of lending affects UK housebuilding

While small businesses across every sector were affected by the credit crunch, housebuilders were amongst the most hard-hit by the financial crisis. Operating in an industry heavily reliant on business finance and reinvestment, they saw their profits drop to nothing as business lending dried up.

But what’s perhaps less known is that smaller housebuilders’ profits are yet to recover to pre-crash levels — which is an alarming state of affairs nearly a decade on, particularly in light of the Government’s ambitious plans for new housing in the next few years.

Our recent research shows that while the larger construction firms have seen their margins exceed pre-crash highs of 11.7%, smaller builders are struggling, with profits only at 7%. In contrast, housebuilders’ profit margins before the crunch averaged 11.2% and 12.2% respectively. So in a nutshell, even though large firms have recovered and are now doing better than they were before the recession, the smaller firms are lagging well behind.

What’s the cause?

The shortfall in new housing construction can be largely explained by lack of finance. The lion’s share of new build construction relies on lending — and although that lending is healthy amongst the larger firms, it hasn’t recovered at the SME end of the market.

It’s no secret that even years after the new Basel III banking regulations came into effect, bank lending to smaller businesses isn’t what it once was. But if big firms have a more difficult time securing lending, the smaller companies will be hard-pressed to do so at all. Many of the mainstream lenders have set-in-stone criteria — and often, large firms are able to satisfy them simply by virtue of being large (for example, because their creditors are larger companies that are more appealing to the lender).

There are other criteria advantages for the big housebuilding companies too, like securing finance at higher loan-to-value ratios because they’re seen as lower risk. Fundamentally, all this means that the big housebuilders are able to go after the larger, more profitable projects.

What’s the impact on smaller housebuilders?

On the other hand, smaller housebuilders are seen as high risk by lenders that remain largely unwilling to fund their projects, no matter what the potential profit looks like — and they’re suffering because of it. These problems are further compounded for construction SMEs because they also find it harder to access various forms of cashflow finance like bank overdrafts and short-term loans.

It’s not a good picture — profit margins are slim at a time when project finance and working capital finance are both difficult to secure, leaving small construction firms particularly vulnerable to cashflow problems.

As well as this heightened vulnerability, small housebuilders are sharply restricted in the scale of projects they can take on. Scaling up for bigger projects involves hiring more people and getting hold of more equipment, and without finance to do it firms are simply unable to take them on.

What can be done?

The banks are still constrained in the level of risk they can take, and smaller companies that don’t satisfy mainstream lenders’ criteria must look elsewhere. Fortunately though, there’s a spectrum of alternative lenders that can help, with a variety of products to suit a range of situations.

Alternative lenders can look beyond criteria that are black-and-white for the bank, and they’re often more willing to lend to smaller firms too. That means the smaller housebuilding companies can get the project finance they need — and with increasingly ambitious housing targets from the Government, the recovery of SME housebuilders would be good for everyone.

Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. With the free Funding Options service, you can quickly search dozens of alternative business finance providers.