Development finance is the key to solving the housing crisis
Paul Howells, CEO of Accumulate Capital
The housing crisis has long been an issue on the policy agenda of successive governments. That’s why I find it surprising that there is still no plan in place to ensure that there are enough properties on the market to meet future demand. Most people seem to think the most obvious solution is to build more houses. This may sound simple enough, but trust me, it’s not.
For more new homes to be built, construction firms need to increase the number of properties they are building. Once again, this sounds like a relatively obvious proposition. In reality, it means addressing the challenges which are currently preventing construction companies from taking on new projects. One of these is having access to the finance needed to commission a project.
This is where property development finance has a prominent role to play. While it is becoming a popular source of finance for more and more construction companies, there is still a knowledge gap when it comes to understanding just how property development finance works.
How does development finance work and what are its benefits?
Property development finance is short-term funding – often fueled through private investment – that is given to property developers. For businesses, it provides important, fast access to development capital to fund a project; while for investors, there is the potential to earn competitive returns over a set period – an appealing factor in today’s low interest rate environment.
It is classed as an alternative form of finance due to the fact that it is arranged by development finance firms, not a high street bank. These firms are equipped with the knowledge and expertise to understand the inherent complexities of construction projects, and arrange finance tailored to the needs of the construction company they are dealing with. Property development firms can also partner with a heritage or challenger bank if senior debt is required.
For investors in development finance, there are many benefits — not least the fact that most funding has a designated maturity date. This allows for an investment that is potentially made more reliable and predictable due to its pre-planned exit strategy.
Can development finance help resolve the housing crisis?
Prime Minister Boris Johnson has committed his government to delivering one million new homes by the end of 2025. Although this sounds like a significant amount, it is actually a surprisingly modest aim, considering most experts think the UK needs to be creating at least 300,000 new homes each year to successfully combat the chronic undersupply of UK housing.
More funding lines will need to be made available to developers rapidly if either target is to be hit, which brings me back to my initial argument. A majority (57%) of smaller developers consider access to finance as one of their main obstacles to success. This is unsurprising: many mainstream lenders have become much more risk averse, adhering to stringent application process that is both time-consuming and complicated. Delays in receiving finance can result in developers having to postpone or ultimately cancel projects.
The current market is marked by low interest rates and general uncertainty. As a result, it will remain difficult for property developers to acquire finance from mainstream channels. This is where property development finance has vital role to play. It is ideally positioned to help fuel the capital needed for the construction of new build properties.
There also looks to be no shortage of private funding available. A survey by Accumulate Capital recently revealed that over a fifth of landlords (21%) are considering alternative property investment avenues like debt investment and development finance. These alternative investment avenues ensure investors can harness the value of bricks and mortar, but without having to worry about managing a property portfolio or conforming to buy-to-let regulations.
Promoting awareness of property development finance
Property development finance can provide the capital construction firms are calling for. That’s why it is important that more is done by the public and private sector to boost investor and business awareness of property development finance. By doing so, property development firms will be on hand to arrange much needed funding to construction companies who are then better positioned to increase their total output. Any strategy that attempts to address the housing crisis will deliver limited success should it overlook property development finance.
Paul Howells is CEO of Accumulate Capital – an investment and property development firm. Accumulate Capital connects registered investors with developers in the property development finance sector to enable selected, high-yielding projects in the UK and overseas.