Funding falls short for SMEs

Steve Menary

Steve Menary Steve Menary examines claims that despite the announcements and the rhetoric, it has been difficult for smaller builders to access funding from either banks or the various state funding initiatives

Plcs have recourse to the markets and rights issues to raise cash, but privately-owned companies rely on the banks – or state funding.

These private firms are mostly small-to-medium sized (SME) companies which need to build more homes if targets are to be met. But despite plenty of noise about the state and the banks being ready to lend, it seems smaller builders are finding it tough to get funding.

“The banks have effectively stopped lending post- Brexit,” says one SME, who does not want to be named for fear of jeopardising any funding applications to the Homes and Communities Agency. “The HCA model is difficult to work so delivery and supply for medium and small companies is almost impossible.

“The criteria for delivering housing is difficult for SMEs because the equity is based on the total scheme costs and the percentage required makes a large scheme undeliverable because the number is in most cases higher than the peak debt for builders that control their WIP (work-in-progress) as they go along.” To test the extent of these problems, Housebuilder submitted a Freedom of Information (FoI) enquiry to the HCA.

Last autumn the government sought to improve development finance by creating a Home Building Fund, which consolidated a number of existing funding streams, chiefly the Builders Finance Fund (BFF).

Insufficient time has passed to assess this new fund, so our FoI asked about money committed from the opening of the BFF on April 29 2014 to the launch of the new Home Building Fund in October 2016.

The BFF was a £525 million fund to restart and speed up viable housing developments between five and 250 units that had slowed or stalled. The target audience was smaller developers. All funding was recoverable and there was a minimum investment of £200,000.

The FoI asked how many loans had been approved from the BFF, the total sums committed and how long each application took to approve. The results will not surprise frustrated SMEs starved of development finance.

A total of 105 projects to provide 7,090 homes received allocations of £238.2 million. So less than half the funds were used in the more than two years before the scheme was rolled into the Home Building Fund.

On average, BFF applications took six months to be approved. According to the figures just four were rejected but the decisions took many weeks. After a 214 day wait, plans for 85 homes in the Midlands were thrown out. Proposals for 80 homes were rejected in the north west as was a 14 unit scheme in the south and south west after 123 days.

These delays will surprise few in the housebuilding industry. In January, the Home Builders Federation published a report that claimed 25,000 more homes a year could be built by SMEs if barriers to entry, including problems with finance, are removed.

HCA explanation
By way of explanation, the HCA says: “Approval is dependent on the developer being able to provide the necessary information required and having met all eligibility criteria. Some of which, for example planning requirements, may only be satisfied post a submitted application but prior to approval. Such instances will result in delays in our ability to make an investment decision.

“Since the loans were allocated we’ve improved our IT systems and processes so that we can more efficiently move from application to investment approval stage however the projects [in the FoI] were more likely to experience longer periods between application submission and investment approval, in comparison to the Home Building Fund, as they were received by the Agency prior to the new system and process being launched.

“The new process removes unnecessary obstacles to advance eligible applications.”

Those obstacles must have been huge in London, where just three BFF applications were given the green light. On average, those applications took 490 days to approve.

Given the problems with new build housing in London, which many volume builders see as a no-go zone, there is a pressing need for development finance. The new Homes for Londoners: Affordable Homes Programme 2016–21 opened to applications on January 31 2017.

The situation at the HCA does seem to be improving but problems remain.

HBF head of communications Steve Turner says: "Whilst the process for accessing finance has improved for some SME builders further work is needed to ensure the Home Building Fund can offer swift assistance to developers starting out or looking to grow. We are working closely with the HCA on the ongoing operation of the Home Building Fund to help maximise the number of builders drawing down funds and support a significant boost to housing delivery numbers." With the deadline for the Homes for Londoners fund closing on 13 April 2017, this column will return to the issue later in the year to assess both this scheme and the new Home Building Fund.

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