While the nation’s largest developers find little difficulty in finding ways to fund large-scale projects, SME developers do not share the same levels of access and exposure. Their ability to source financing can also differ depending on where they are looking to build, with SME housebuilders in the Midlands and North stating development finance as a major barrier, compared to just 3% in the South.
Money, therefore, must be found elsewhere, but what options are on the table?
The High Street
One of the first calls that most SME developers make is to the high street banks and building societies. These are the institutions that provide the largest amount of overall funding for SMEs, and they’re not against the idea of providing significant levels of funding. However, it is also true that some high street lenders tend to avoid working with small-scale house builders and can lack flexibility.
Alternative banks
If the high street lenders aren’t interested, the next stop is usually other types of banks. These would include challenger banks, rather than the big household brands, and overseas banks. They provide funding in the same way as high street lenders and they are often willing to provide higher risk leverage. However, such leverage tends to be accompanied by higher pricing. Their speed, flexibility and risk appetite for more complex deals can be seen to outweigh these higher rates, for which the total additional cost can be lower than that of risking a delayed build or missed opportunity. These smaller banks also often specialise in certain asset classes or product types meaning they can offer a more in-depth understanding of a project and be willing to work with the borrower to find a bespoke solution.
Individual investors
Outside of the banks, individual investors are a common presence in the world of housebuilders. High Net Worth individuals with deep pockets are often drawn to the relative security of the property market when investing, and while those deep pockets might not be deep enough for the big housebuilders, they certainly are for SMEs.
Brokers
Brokers, or real estate debt advisors, can help link SMEs with sources of funding that might otherwise not be accessible. Their expertise, contacts and strong relationships with the lenders and associated professional teams can often help open doors that an SME housebuilder would otherwise be unaware of. This includes private equity and forward funding which is a world many SMEs would struggle to infiltrate without intermediaries. A property finance broker can also provide advice on innovative ways to structure a bespoke debt package to service a development project seamlessly through acquisition, construction and the sales tail, development exit or investment.
Crowdfunding
A relatively new phenomenon, crowdfunding is increasingly popular when funding development projects. It sees a large number of investors provide relatively small amounts of investment which, when combined, provide the required amount of funding. Crowdfunding investors are open to various options from equity to debt finance. Crowdfunding projects are almost exclusively conceived and managed via online, digital platforms.
Government-supported funds or schemes
Houses and construction are so vital to the national economy that the UK government provides a lot of funding for house builders large and small. For SMEs, the best places to look are the various schemes on offer, such as the Home Building Fund, the Housing Growth Partnership, the Housing Delivery Fund, and the British Business Bank.
Managing Director of Sirius Property Finance, Nicholas Christofi, commented: “SME housebuilders play a vital role in the delivery of new homes across the nation, but securing finance can often be a far larger hurdle to overcome when compared to the more established operators within the sector.
"However, there are a wealth of routes available when it comes to securing funding and we rarely find that these options are exhausted before an SME manages to secure their required level of funding.
"Even the most weird and wonderful endeavours can be facilitated by a specialist lender and it’s just a case of putting the pieces together.”
