The latest research from Sirius Property Finance has shown that it’s crucial the government introduces measures to increase the number of small to medium sized housebuilders. The number of SME developers, who typically deliver between 1 to 1,000 homes per annum, has decreased by 80% since the late 80s.

So why do we need these smaller players when we have national housebuilders delivering in volume? The SME has long been billed, by those in the know, as the lifeblood of regional property markets.  In comparison to the big-name developers, SMEs usually focus on smaller projects that would be otherwise overlooked – for example, inner-city sites that don’t meet the minimum quotas of the larger businesses.

SME builders provide more diverse stock and innovation as they have the ability to be nimble and they also support other smaller property professional practices such as smaller law firms and local architectural practices. Last but by no means least, many are leading the way in low carbon building practices.

The data shows that in 1988, there were 12,215 SMEs operating across England – delivering 77,524 new homes to the market. That was 40% of all new homes, with an estimated market value of more than £4.6bn.

In comparison, the latest data shows SMEs are on the verge of extinction with just 2,500 currently operating across England. That’s an 80% reduction since 1988, at a rate of 335 SME developers a year. As a result, the number of new homes built on an annual basis by SMEs has reduced from 40% in 1988 to just 12% today. The only silver lining is that far higher new-build house prices mean the value of this 12% is higher than the 40% built back in 1988 at almost £5.8bn.

SMEs have long proven their contribution to economic growth and value to the micro-markets and communities in which they operate, so what has been contributing to this decline?

Since the late 80s SMEs have faced various challenges, including a reduced level of opportunity due to not one, but two financial crashes. Perhaps more notably though is the argument that the UK’s planning system, driven by housing targets and a shortage of local authority staff, has been prioritising larger schemes. This continues to cause delays that disproportionally affects smaller housebuilders, many of which simply do not have the cash flow to sustain such time lags. Whilst larger housebuilders have the resources to begin one project whilst awaiting planning on a handful of others, for smaller entities this is not viable even with clever use of debt to leverage. Sirius has helped numerous developers utilise bridge loans whilst awaiting planning but, in some circumstances, continued delays in the planning process mean it’s not always a viable option to enter into a short-term product without an exit in sight. A lack of buying power in an increasingly fraught supply chain has also seen many leave the market.

But is change on the horizon? In February of this year, the government’s housing accelerator, Homes England, together with United Trust Bank, announced a £250m fund aimed at supporting SME builders – with the additional carrot of development finance available up to a 70% loan to gross development value. 

This long overdue government initiative is, of course, welcome but is it too little too late?

It’s certainly good news that the government is finally recognising the important role that SMEs play in delivering much-needed housing stock as well as creating greater diversity and competition, and the hope is that these measures will encourage experienced developers back into the market and attract new entrants with fresh perspectives. It’s also good news that there are plenty of finance options for those developers that are investigating new schemes.

The Home Builders Federation 2021 survey found that development finance was rated as the lowest barrier to growth by SME housebuilders, with 41% not considering this to be a barrier to growth. Further data analysis by Sirius uncovered a ‘post pandemic development finance boom’, showing that that whilst overall UK real estate lending declined 23% from 2019 to 2020, lending focused on the financing of new real estate developments bucked the trend, increasing by 6.9% in the same time period.

Whilst no one is disputing the importance and value of the national housebuilders, there is certainly room and requirement for more niche builders and a greater variety of competition to keep standards high. Who else is going to tackle the quirky historic building conversions and pocket-sized inner city brownfield sites if not the SME developer?

The playing field needs to be levelled. Otherwise, we face the undesirable prospect of a property industry without this vital subsector and an inevitable decline in vibrancy and character. The specialist development lenders that Sirius works with have a strong appetite for supporting SMEs and are willing to provide the flexibility required by this group. This, combined with the government’s pledged support, could be the turning point that sees a reversal of the downward trend – and smaller developer numbers on the rise again.  

By Kimberley Gates, Head of Corporate Partnerships at Sirius Property Finance

Market analysis by real estate debt advisory specialists, Sirius Property Finance, has looked at where Britain’s homebuyers are most reliant on the mortgage sector when making a purchase and where house price growth could stutter should monthly interest payments start to climb as a result of the latest interest rates increase.

Sirius Property Finance analysed property transactions across Britain since the last drop in interest rates in March 2020 and the latest increase, looking at what percentage of sales were funded by mortgage lending rather than by cash buyers.

Across Britain as a whole, 67% of all transactions to have been completed since March 2020 have done so with the help of a mortgage.

Homebuyers in the South West have been least reliant on mortgage lending with just 60% of purchases completing with the help of a mortgage, followed by the North East (63%) and Wales (64%).

In contrast, the high cost of purchasing a property in the capital means that 76% of all transactions across London have done so with the help of mortgage lenders, with homebuyers in the West Midlands (69%) also most in need of financial assistance when climbing the ladder.

London also accounts for the top three areas of the market for mortgage property purchases at a more granular level.

Barking and Dagenham ranks top, where 85% of all property purchases since March 2020 have been by mortgage funded homebuyers, with Waltham Forest (84%) and Lewisham (83%) also home to some of the highest levels of mortgage homebuyers across the nation.

Other areas where an increase in mortgage costs could dent market activity and house price growth include Midlothian, Slough, Watford, Crawley, Thurrock, Harlow (82%), Croydon, Hillingdon (81%), Rushmoor, Greenwich, Bexley and Stevenage (80%).

Managing Director of Sirius Property Finance, Nicholas Christofi, commented:

“House prices have never been higher and so it’s hardly surprising that the majority of homebuyers require a financial helping hand in the form of a mortgage when looking to purchase a property.

On average, these homebuyers will pay around 9% more than their cash funded counterparts and so it’s these buyers who have generally helped drive the heightened levels of house price growth seen over the last year or two.

However, the areas of the housing market where mortgage funded buyers account for the largest proportion of activity are also those most susceptible to a drop in momentum should mortgage rates start to climb.

While an increase in monthly mortgage repayment costs is unlikely to deter our appetite for homeownership completely, it will certainly see many reevaluate the total sum they are willing to borrow and therefore the price they are willing to pay for a property.

The good news is that the cost of borrowing remains very favourable despite the Bank of England’s decision to increase the base rate during the later stages of last year and, for the time being at least, those purchasing with the aid of a mortgage are still in a very strong position.”

Market analysis by real estate debt advisory specialists, Sirius Property Finance, has looked at how an increase in interest rates could dent our appetite for homeownership based on data trends seen over the last decade.

Sirius Property Finance analysed the level of monthly mortgage approvals seen over the last 10 years as well as the average mortgage interest rate for a two year fixed rate mortgage at a 75% loan to value.

So far in 2021, the average level of mortgage approvals has rocketed to 80,671 per month. By far the highest level seen in the last decade and 64% higher than the average level seen back in 2011.

At the same time, the average rate of interest on a mortgage has fallen to its lowest level in the last ten years at just 1.43% – 57% lower than the 3.34% seen in 2011.

But how could an uplift in interest rates impact homebuyer appetites where mortgage approvals are concerned?

The analysis by Sirius Property Finance shows that over the last 10 years, the level of average monthly mortgage approvals has sat at 68,556 when mortgage interest rates have been between 1.1% to 2%.

When they’ve climbed above this level to between 2.1% and 3%, the average number of monthly mortgage approvals has dipped to 62,847, a drop of 8.3% per month.

However, when the average rate of mortgage interest has exceeded 3.1%, the level of monthly mortgage approvals has fallen a further 20.4% to just 50,001 per month.

Head of Corporate Partnerships at Sirius Property Finance, Kimberley Gates, commented:

“We’ve seen a sustained period of record low interest rates help drive market activity for quite some time now and so it’s only natural that any uplift is likely to reduce homebuyer appetites due to the greater cost of borrowing.

The good news is that any increase is widely expected to be marginal and so while we may see a slight decline in the level of mortgage approvals as a result, it’s unlikely to stop the market in its tracks.”

Average monthly level of mortgage approval data sourced from the Bank of England – Mortgage approval house purchases SA.

Average rate of mortgage interest sourced from the BSA based on a two year fixed rate mortgage with a loan to value of 75%.

Market analysis by real estate debt advisory specialists, Sirius Property Finance, has revealed how the pandemic has impacted the mortgage sector, with the total value of mortgage approvals up 26% compared to the pre-pandemic market.

Sirius Property Finance analysed mortgage approval data since the start of the pandemic (February 2020) to see how the market has performed compared to the equivalent time period prior to the outbreak of COVID-19 in the UK.

The research shows that on average 74,034 mortgages have been approved on a monthly basis during the pandemic, up from 65,852 per month during the same time period prior. In total, 1,554,704 pandemic mortgage applications have been approved, 12% more than pre-pandemic levels.

But it’s not just the level of mortgage approvals that have climbed, the total value has also increased notably.

Prior to the pandemic, the average value of mortgage approvals sat at £12.6bn per month with a total of £264.4bn worth of mortgages approved between May 2018 and Jan 2020.

Since the outbreak of COVID-19, almost £15.9bn worth of mortgages have been approved on a monthly basis to the tune of £332.9bn in total – a 26% increase versus pre-pandemic levels.

Managing Director of Sirius Property Finance, Nicholas Christofi, commented:

“It’s quite amazing that, despite a global pandemic, the UK property market has boomed and the not only have mortgage approval levels climbed considerably since February 2020, but the value of these approvals has also taken a considerable leap.

A pent up level of demand due to prolonged political uncertainty prior to the pandemic has certainly played a factor while the cost of borrowing has also remained at record lows. Coupled with incentive of a stamp duty saving, we were always likely to see an increase in buyer activity.

However, it’s no doubt the pandemic itself that has been the driving factor behind an increase in the values being borrowed. Having been subjected to numerous stints of lockdown restrictions, homebuyers have pushed their budgets for larger homes with more space both indoors and outdoors and they’ve borrowed more in order to achieve this.”

Mortgage approval data sourced from the Bank of England database.

Research by real estate debt advisory specialists Sirius Property Finance has revealed that Warwickshire, Oxfordshire and Cambridgeshire rank as the nation’s housebuilding hotspots when it comes to the number of new homes build on an annual bases in relation to the total size of the property market.

Sirius Property Finance analysed government housebuilding numbers for total permanent dwellings completed in 2020/21 across each count of England, and then looked at how this figure stacked up when compared to the wider context of housing market size, by comparing it to the total number of dwellings in each country to see where we’re really building the most.

Regionally, the largest injection of new homes was seen in the South East, where 27,270 homes were built equating to 0.68% of the total property market.

At a county level, Warwickshire has seen the biggest boost to the local property market in the way of new housing stock. The 3,050 homes built during 2020/21 is equivalent to a huge 1.16% of the existing property market.

Sirius MD Nicholas Christofi comments:

“The nation needs more housing and while some areas may have been marked as housebuilding hotspots, the real impact of this housing delivery can’t always be established based on top line completion figures alone.  

When viewing build completions against the wider context of overall market size, we can get a better idea of where has seen the biggest boost to the property market in terms of the number of new homes being delivered.”

In 2019, prior to the COVID-19 outbreak, they totalled £5.4 billion. However, they have since fallen to £2.7 billion in 2020 – a pandemic decline of -49%.

Sirius Property Finance analysed the pre-tax profits of the nation’s 12 largest housebuilders and found that in 2019, prior to the COVID-19 outbreak, they totalled £5.4 billion. However, they have since fallen to £2.7 billion in 2020 – a pandemic decline of -49%.

While these annual profit losses are significant, in some cases extraordinary, the limited insight available on 2021 profits reveals early signs of recovery for the vast majority of developers. Of those developers that have so far published profit reports for 2021, all but one have seen positive bounceback after a difficult 2020.

Despite these developers largely enjoying an uplift in profits between 2020 and 2021, no developer has yet managed to work their way back to pre-pandemic profits of 2019.

Managing Director of Sirius Property Finance, Nicholas Christofi, commented:

“While much of the property market enjoyed a pandemic-inspired boom, housebuilders and developers were not so lucky. Initial workplace restrictions caused construction sites to shut down for a period of time and, when allowed to reopen, COVID continued to cause problems both on site and across the global supply chain, sending the cost of materials skyward. 

Furthermore, economic uncertainty meant that backers and investors were less inclined to pump money into major developments until the dust had truly settled.

All of this meant that in 2020, less projects were completed and those that were took much longer and cost a great deal more than planned. Hence the significant decline in annual profits more or less across the board. 

Sirius Property Finance has revealed that land plots account for just 1.4% of current for sale stock listed on the market and demand is high, with 55% of these already being snapped up by developers. 

As part of the most recent Budget statement, Chancellor Rishi Sunak announced £1.8 billion of government money to help fund the regeneration of brownfield land up and down the country as part of a mission to satisfy the ever-intensifying need for new homes. 

Table shows the availability of land plots as a percentage of all for sale stock in each area, as well as demand based on the percentage of land plots that are already sold subject to contract or under offer.

The research shows that there are some 677,533 residential property opportunities listed on the current market, with just shy of 10,000 of these coming in the form of land plots available for development. 

What’s more, 55% of these plots have already gone under offer or sold subject to contract.

While land plot availability may be scarce, demand is high. In Bournemouth, 77% of all land plots listed on the market have already been marked as under offer or sold subject to contract, while Bristol (68%), Newcastle (67%), Cardiff (60%), Edinburgh (57%) and Nottingham (57%), are also home to above average levels of demand.

Managing Director of Sirius Property Finance, Nicholas Christofi, commented:

“Land plots currently account for a minute proportion of available property purchasing opportunities but the appetite for these plots is clear, with more than half of those listed already being snapped up across the nation.

We need more homes and we need them quickly. Opening up the nation’s brownfield is just one step in addressing this shortage and while it will utilise land that has otherwise been overlooked for quite some time, it certainly won’t solve the problem in its entirety.”

On average, the estimated annual interest on development finance sits at approximately five percent per annum – around 0.42% per month.

Based on the loan amount of £5m over one year, property developers opting for the traditional route to build would see £252,000 paid in interest in over just 12 months.

Opting for the modular build route could see construction complete 30% to 50% quicker than a traditionally built development.

By reducing this construction time by 30%, developers could see an interest saving of £75,600 in a single year – £9,000 per month.

However, by cutting this timeframe by 50%, this saving climbs to £126,000 per year or £21,000 per month.

Rishi Sunak recently announced that the Government would finally utilise Britain’s brownfield, investing £1.8 billion to deliver 160,000 new homes. Sirius Property Finance’s latest research reveals just how insignificant this investment is based on the actual level of brownfield land available.

The Ministry of Housing, Communities and Local Government estimates that there is some 36,700 hectares of brownfield land across England alone, over 51 million square metres.

With the average home requiring a plot of 275 square metres, that’s enough to deliver more than 1.3 million new homes, more than eight times the volume promised by the Government.

Sirius Property Finance also looked a the market value of these new homes based on current new-build house prices in each region.

Across England as a whole, the 1.3 million potential homes that could be built on brownfield land would total a staggering £487 billion worth of property.

Defined as small to medium-sized housebuilders, SME developers typically deliver between one and 1,000 homes to market on an annual basis, with a focus on smaller projects compared to the big names in the sector.

In February of this year, the Government’s housing accelerator, Homes England, together with United Trust Bank, announced a £250m fund aimed at supporting SME builders – with the additional carrot of development finance up to a 70% loan to gross development value.

The estimated number of SME Developers and how this has changed between 1988 and 2017:

The data shows that in 1988, there were 12,215 SME developers operating across England delivering 77,524 new homes to the market. However, in 2017 this number was down to just 2,500. That’s an -80% reduction since 1988 at a rate of 335 SME developers a year (-2.7%).

The market share of SMEs all new homes built in 1988 and 2017:

The number of new homes built on an annual basis by SMEs has reduced by 40% in 1988 to just 12% today. The only silver lining is that far higher new-build house prices mean the value of this 12% is higher than the 40% build back in 1988 at almost £5.8bn.

It is important to note that SMEs have faced various challenges between 1988 and 2017 including red tape barriers around finance and planning, a reduced level of opportunity due to not one, but two financial crashes, complicated public procurement processes and most notably, growing competition from the big housebuilders.