Small and medium-sized developers have a key role in delivering housing. Keeping credit flowing is critical in enabling them to carry on building, writes Roxana Mohammadian-Molina


Just at a time when sentiment was starting to look more positive and we were hoping to start spotting those long-awaited green shoots of growth, the IMF delivered a bombshell in its latest World Economic Outlook. This week it said that it expects the UK to be the only country across all advanced and emerging economies to shrink this year – contracting by 0.6% and tailing behind the likes of Italy, Spain and even heavily-sanctioned Russia.

The cost-of-living crisis, rising mortgage costs, soaring taxes, persistent worker shortages and stagnant productivity levels are holding the UK back. But beyond the short-term economic pain, what might a recession mean for the UK’s struggling housing market?

In my mind, the real risk of a recession like the one the IMF currently predicts, is that of further downward pressure on the supply of housing in an already stretched market, due to a lack of access to lending. At a time when chronic housing shortage is one of the biggest challenges the UK faces, the credit tightening faced by property developers is a silent threat to long-term supply of affordable housing.

And things are set to get worse before too long

According to government housing supply indicators, there were 194,063 new built dwellings completed in 2020-21. This is 9.5% down from 2018-2019 and 11% lower than in 2019-2020, and well below successive governments’ long professed but recently dropped target of 300,000 new homes per year.

Over the past decade, an average 162,000 new dwellings have been completed each year across the UK, with pretty much no growth at all in annual completions despite housing supply being often cited as one of the most significant challenges of our times. And things are set to get worse before too long.

According to the Construction Products Association’s (CPA) latest Autumn Construction Forecasts, published last November, construction output is expected to fall by 3.9% this year. That’s a sharp downward revision from the -0.4% predicted in the Lower Scenario of the CPA’s Summer 2020 Forecasts, which the CPA said was due to the impact of wider economic challenges, intensified by the impact of last September’s ”mini budget”.

So, what can be done to boost housing supply and construction activity?

Elsewhere, RICS recently revealed a large loss of momentum in construction with only 8% of surveyors expecting a rise in overall workloads in the next 12 months. The IMF’s forecast of a UK recession this year and the current ongoing credit tightness has profound consequences for the future of UK housing supply in an already undersupplied market. Sadly, many SME housebuilders see access to finance as a challenge that is preventing them from reaching their ambitions for growth and is even threatening the existence of some businesses. 

A survey of almost 200 SME home builders across England and Wales carried out by the Home Builder’s Federation revealed that access to finance remains one of the main barriers to housing delivery, even though stark regional differences exist. 18% of respondents in the North and 24% of respondents in the Midlands saw development finance as a major obstacle, as compared to just 3% of respondents in the South.

So, what can be done to boost housing supply and construction activity? I believe that part of the solution lies with specialist development finance lenders. Specialist lenders must be brought into the fold to support SME developers. With their nimble and agile structures and appetite for lending, these regulated lenders can lend where banks cannot or will not lend.

Currently, many SMEs simply aren’t aware of the other lending options available to them

Government and industry must act now to support the housebuilding sector in a bid to ensure quality and affordability for UK tenants and renters over the next decade. We know that many SMEs approach their banks first for lending and when they get refused, they sometimes feel that there is nowhere else to turn for finance. This sometimes means that viable, but slightly higher risk schemes can become stalled due to a lack of lending.

One important step that government could take would be to recommit to the Bank Referral Scheme, which requires banks that refuse to lend, to automatically refer SMEs to alternative lenders, such as specialist developer finance. Currently, many SMEs simply aren’t aware of the other lending options available to them. 

It is particularly important to support mid-sized developers because it is often these businesses who build-out the complex and much-needed small schemes in our towns and villages that larger housebuilders avoid. Specialist development finance lenders have a vital role to play in supporting small and medium housebuilders, by easing the funding pressure.

Well-capitalised, agile, and flexible specialist development finance lenders are in a strong position to lend to small and medium-sized housebuilders who need access to finance, so that they can continue building the homes the country needs to address the housing shortage.


Also read >> Housing approvals slump to lowest level for a decade