Investing in the volume builders of the future

Ben Roskrow

Ben Roskrow A public/private partnership between Lloyds Bank and the Homes and Communities Agency aims to support SMEs in building new homes nationwide, looking to partner with firms who wish to grow. Ben Roskrow finds out more

It is not easy to find the offices of the Housing Growth Partnership. The building itself is tucked away under a tunnel in central London, and, once through the doors, visitors are required to report to no fewer than three receptions to reach their goal.

(Pictured) The Devonshire Homes team including managing director Steve Russell (third right) with Lloyds and HGP team members including investment director Andrew Fairley (right)

As a metaphor for accessing housing development finance, this challenging route is perfect – there is even a mezzanine level to tackle.

But the Housing Growth Partnership is worth visiting – because this private/public partnership is striving to be part of the solution rather than adding to the problem. HGP is open for business and was founded with £100 million to invest alongside small to medium sized housebuilders – a vital source of money in the drive to help SMEs thrive in the new homes sector.

Housebuilder has been keen to highlight the challenges facing housebuilding SMEs, prompted by conversations with the smaller players who say that despite the raft of government announcements and initiatives promising new funds, they are still struggling to source finance. Last month in this magazine we revealed the result of a Freedom of Information request which showed that less than half of a key fund for smaller builders had been lent out in more than two years and that each application had taken more than six months to process.

(Pictured) HGP invested £1.7 million to support Campbell Buchanan in building 40 homes in Brington, Cambridgeshire

These findings were reinforced by the publication in January of a new report from the Home Builders Federation which exposed the challenges facing SMEs in getting on in the market and building new homes. The report revealed several obstacles to entry for the SMEs, chief among which was financing.

The Housing Growth Partnership is trying to help out here.

Think tank
The idea originally came from Lloyds Bank who commissioned a think tank from Cambridge University to look into the market – and one of the findings was that more SMEs are required to boost supply. But to do so these firms need proper support and one of the key factors, the think tank found, was access to finance. And Lloyds Bank wanted to help in this area.

(Pictured) James Hutchinson of HGP: “We are trying to find partners with a track record of delivery and the desire to grow their businesses”

James Hutchinson is one of the team of HGP investment managers with a background at Lloyds, lending to housebuilders. He explains why the bank wanted to get into lending to housebuilding SMEs in this way: “Lloyds wants houses to be more accessible and by helping families access quality homes, in the right places, we can help to ensure that the UK has a healthy and sustainable housing market ,” he says.

In 2014 Lloyds launched its “Helping Britain Prosper” plan, which has ambitious targets. The plan says: “We want to go beyond business as usual and help address systemic social and economic challenges such as Britain’s housing shortage, the skills gap in key industries, social mobility and social disadvantage. We know from long experience that when Britain prospers we do too, so the plan is an investment in our collective long term success.”

Investing in housebuilders is just one of the many strands of the plan so the bank set aside £50 million for the fund. The Homes and Communities Agency liked what it saw and joined forces with Lloyds adding a further £50 million, forming the Housing Growth Partnership with £100 million of seed money to invest and the aim of facilitating the delivery of 2,000 homes. This makes it the only housing related public/private partnership with the UK government, Hutchinson says.

(Pictured) HGP has invested £2 million to support Devonshire Homes' construction of 100 homes at  Cullompton in Devon

HGP is not just about investing money. It seeks to be a genuine partner. “As investors we place particular importance on partnering with the scalable volume builders of the future to support the growth of their businesses, increasing the number of homes they can produce. And as thought leaders, we lobby for crucial change and drive financial innovation in the sector to help increase UK housing supply,” says Hutchinson. ”Our strategy is to invest equity on a site specific basis in return for an equitable share of the profit. Profit share is agreed on a case by case basis but recognises both the capital contribution and sweat equity of the developer. No interest margin or fees are charged and our investment ranks equally with the housebuilder ensuring we share in both the upsides and the downsides as partners. HGP receives its share of repayment and profit share at the same time as the partner does.” The developer’s contribution can be in the form of capital and/or land and HGP does not seek to take an active role in the management of the development. The developer retains responsibility for the management of the project with a management fee paid monthly for undertaking this role.

The partnership uses the experience of some old wise heads in the industry as advisers. These include Home Builders Federation board member and former housebuilder chief executive Neil Fitzsimmons, former Persimmon board member and chair of HBF’s Small Builders Group David Bryant, and former David Wilson Homes leaders Greg Locke and Mike Stansfield. They assess the potential schemes and the management teams and provide a mentoring service to smaller builders if required. Over the past 12 months this senior adviser panel has delivered more than 1,000 hours of free mentoring to small housebuilders.

All regions
“We are trying to find partners with a track record of delivery and the desire to grow their businesses,” says Hutchinson. “We are looking to support the building of quality homes in all regions of the UK. A key part of our investment process is about cultural fit and whether we can imagine building a long term relationship, covering multiple sites, with the builder and its team.”

In its first year of trading HGP invested one third of its committed capital to fund the build of more than 1,000 family homes on 18 sites throughout the UK. “We are well positioned for further growth with 2,300 homes in our development pipeline and counting,” says Hutchinson. “We are currently seeking to partner with businesses that have built between five and 175 residential units per annum on average over the past three years and have a desire to further grow their business.”

HGP process
• Initial feedback provided quickly with short approval processes
• Streamlined and cost effective due diligence on all investments
• Typically a two month process: two to three weeks to understand the applicant’s business model and funding requirements and four to six weeks to complete the investment

HGP investment parameters
• Equity investment of up to £5 million
• Minimum developer contribution of 10% of total costs
• Gross development value (“GDV”) of between £4 million – £35 million
• Average selling price does not exceed £750,000 per unit
• Ideally a minimum of outline planning permission at the point of investment with construction capable of commencing within 12 months

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