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We need to get SME developers building again

Jatin Ondhia is co-founder and chief executive of Shojin, an FCA-regulated online real estate investment platform that lowers the barriers to entry for individuals across the globe looking to access institutional-grade, UK-based real estate investment opportunities. Here, he explores why we need to support SME developers to boost UK housebuilding, and how we do it…

SME developers are those that typically contribute anywhere between 1 and 1,000 homes per year to the UK housing stock. Over the years, they have played a vital role in helping aspiring homeowners realise their dreams. However, their contribution to the UK’s housing stock has declined: according to the House of Lords Report ‘Meeting housing demand’, in 1988 SME House Builders were responsible for 39% of homes but in 2020 that figure stood at only 10%.

Plainly, this means that the concentration of housebuilding, market share, and access to resources is more heavily aligned with large-scale developers. The decline of SME housebuilders has no doubt added pressure to the UK’s housing crisis – the lack of supply of rent and mortgage deposits that is diminishing that once universal ambition of homeownership. For many today, with deposits costing more than annual salaries while rents continue to soar, that dream is no longer a realistic one. The Mayor of London himself recently came clean about the reality of house prices in the capital.

The fact is we have to get building and we have to promote development. But as a vital source of competition, no group is more important than SME housebuilders – the consequences of allowing the large-scale developers to reach hegemony within the market have become apparent through the unreachable home prices across the country.

The challenges facing SME housebuilders

Unfortunately, SME developers face enormous challenges. With the grip of large-scale developers upon the market so normalised, access to finance is increasingly hard to come by for SME developers. So great is the scale of the problem, MPs have launched an inquiry to understand it further.

Meanwhile, building costs have made their largest jump in over thirty years, now almost a quarter (23%) more expensive than they were three years ago. Although house prices have increased to an even greater degree over this period, for SME developers which lack the same financial reserves as larger developers, it has required fresh funding in order to complete projects – funding which is difficult to come by.

Combined with the larger shocks to the economy following Brexit, the pandemic, ongoing supply chain shortages, and now soaring inflation and interest rates, the sector remains off balance with increasingly cautious onlookers. The consequences of these shocks include a decreased appetite for lending, a shortage of labour, and delays in shipping components. All of which incur added costs at a time of rising overheads.

Despite the urgency to address these challenges, the government made no intervention during its most recent economic statement.

Underpinning all of this is the availability of buildable sites. The planning system which is controlled locally is notoriously slow, with applications often taking years until they reach the committee stage. Meanwhile, many councillors face immense nimby-led community pressures, decreasing political appetite for local building.

Of course, public representatives should make decisions on behalf of their voters’ wishes, however, it has become increasingly hard to resolve the national need for more housing against local protectionism which calls for whole areas to remain at two-storey level and at constant population. Our decentralised planning system has, therefore, struggled to produce the housing output the country so desperately needs.

Adding to the challenge is the revolving door of housing ministers responsible for this brief. Since 2010, there have been 15 housing ministers and, not one has had time to grapple with the issue.

Raising capital through peers

In the absence of any meaningful government intervention, SME developers can find peer-to-peer finance as a salvation for financing needs. Peer-to-peer finance and debt crowdfunding allows individuals or businesses to raise finance directly from high-return-seeking investors. This is where Shojin can support the industry.

This has been particularly powerful in the property sector because, by expanding the potential pool of finance, it has allowed builders to access capital which has become increasingly concentrated toward large-scale developers. Moreover, it has given ordinary investors the opportunity to invest in a property – an asset notorious for its exclusive nature.

As the UK’s housing stock continues to be dominated by large-scale developers, peer-to-peer finance offers SME developers an opportunity to reclaim their stake in the market and help to deliver the homes the nation so desperately needs. However, to truly unlock the potential of this willing enterprise, the government must promote investment in the market and finally address problems in the planning system.

 

Jatin Ondhia is Co-Founder and CEO of Shojin, an FCA-regulated online real estate investment platform that lowers the barriers to entry for individuals across the globe looking to access institutional-grade, UK-based real estate investment opportunities. He served as Director for UBS for nine years, using his wealth of knowledge and experience to provide strategic fixed-income solutions to the bank’s top clients and expand the UBS Delta businesses in the intermediary space. Jatin also has over 20 years of property investment experience.

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