SME housebuilders need to diversify their debt

It turns out housebuilders’ debt is among the most concentrated of any industry, with the majority of it held by just five heavyweight banks; however, alternatives are available for SME housebuilders prepared to look beyond the high street.

KPMG has issued a stark warning to housebuilders: diversify your debt or risk severing the industry from vital funds.

The Telegraph recently quoted a debt advisory director at KPMG as saying that more than 80% of the listed housebuilders’ £10 billion of debt is held by just five high-street banks. In the event of an economic turndown, banks could decide to snap back lines of credit leaving housebuilders with nowhere to turn.

The five banks, namely RBS, Barclays, HSBC, Lloyds and Santander, also happen to be the biggest players in the mortgage market, which would aggravate any financial woes felt by the housebuilding industry. SME housebuilders are likely to be the hardest hit, with limited access to alternatives.

Appetite for SME lending has seen a dramatic fall this year, plummeting by £200 million in July alone, according to Bank of England data.

The National Federation of Builders (NFB) believes that more should be done in promoting alternative finance products to construction SMEs for them to successfully diversify their debt.

According to the British Business Bank (BBB), awareness of different finance products is decreasing as 38% of SMEs still went directly to their main bank when needing a loan between 2016 and 2017. The BBB additionally highlighted a regional imbalance in the distribution of finance to companies that wanted to rapidly grow, with almost 60% concentrated in London and the south east.

Paul Bogle, head of policy and research at the NFB said, “SME housebuilders have close ties with their local communities. They build homes more quickly and to a higher quality standard than major housebuilders. Unfortunately, they still struggle to access finance in order to build more homes.

“That is why ensuring that SMEs are made more aware of alternative finance choices is vital to tackling the housing crisis and getting Britain building.”

However, with the bond market largely off-limits thanks to the cyclical nature of the housebuilding market, alternatives to bank loans are limited.

A lack of finance is among SME housebuilders’ biggest bugbears, according to research by the Federation of Master Builders. Nonetheless, according to specialist lenders, funds are available to SME housebuilders who look beyond the high street.

“Whilst it’s fair to say that the high-street banks have reduced their appetite for development funding for smaller companies, there is a thriving sector of specialist lenders with the skills, funds and appetite to help SME housebuilders acquire and complete smaller residential and mixed use projects,” said Noel Meredith, Executive Director of United Trust Bank. “If SME house builders look beyond the high-street, or approach one of the many professional brokers helping developers to find and secure competitive funding solutions, I believe they will be surprised at how much choice they have.

“Yes, relevant experience and a sound financial footing is essential, but housebuilders who can demonstrate that they have the ability to deliver successful projects and who are proposing well thought-through schemes of the right homes in the right places, and for the right prices, should be able to find a supportive finance partner.

“So far in 2017 United Trust Bank has funded developments with a combined value in the region of £350m and we are keen to increase that figure substantially in 2018.”

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