With KKR recently teaming up with an alternative SME development lender, and Barclays’ announcement to launch a £1bn fund with Homes England, a new national agency designed to combat the housing crises by delivering homes the county needs, the alternative lending market is rapidly moving it up a notch. There is even talk that Handelsbanken, the Swedish lender, is considering opening up the taps for UK SME lending, and so are a few other banks through special joint ventures. It appears that the early pioneers of P2P proved that the concept of alternative lending worked, followed more recently by the challenger banks. Now that the model is proven, a more institutional type of alternative lender is slowly developing.
And why not. The SME lending market is vast. The UK, by all accounts, needs roughly 300,000 new homes per year, and the financial requirement to make that happen is a whopping number over the next ten years. Add on top of that the overall social focus of bringing back smaller SME borrowers back into the mainstream by government supported programs and you have a cocktail for opportunity and growth in this market. It is no wonder so many institutional investors are paying attention.
Banks have continued to retreat from development finance year-by-year, driven by increased regulatory and capital restraints. Bank lending in the real estate development sector declined from £23.9 billion in 2008 to £14 billion in 2017. This has meant that the financing requirements of SME housebuilders considerably exceed the funding available in the market. Estimates from from the Ministry of Housing, Communities and Local Government and Nationwide Building Society data on house price indices, indicate that the funding gap for the next 10 years, based on the annual target for new homes, is circa £208 billion.
But…..Many of these institutional and new challenger providers of residential development finance may not have the skill set to underwrite smaller developments loans which take time and oftentimes are done on a bespoke basis. One shoe doesn’t fit all, and big institutional type lenders are by their very nature, required to rely on automation and volume. This opens the way for smaller boutique lenders to enter the market, backed by more risk-savy capital. These entrants, small and with skills and capital, will move faster and increase competition in sourcing and funding residential development projects.
In fact, many of these new smaller competitors to the market may have greater real estate development, financial, technical and market research background from the field which will up the ante even more. Additionally some of these new entrants may have higher risk tolerances, different risk assessments or even access to different sources of funding, which will allow them to take on a wider variety of loans and establish more relationships than the larger newcomers.
Additionally many SME loans will be smaller than what most larger lenders are accustomed to underwriting. With a focus on SME lending, filtering better known developers is a meet and great type of business, with a development track record even more important than the project itself. Only kicking the tires can determine the quality of a borrower or project and this is where smaller lenders will have an advantage.
The Government ‘s Backing
Theresa May has has pledged to make fixing Britain’s broken housing market her personal mission. Promoting SME house building is also at the top of the list of priorities and the Prime Minister has designated housing as one of the three key domestic priorities as set out in the Housing White Paper. The Housing White Paper sets out the following aims:
- To promote SMEs over the large housebuilders;
- To identify appropriate sites for development (including Government land)
- To promote higher densities in urban locations.
The waves of change are pushing towards the shore. First the democratisation of investing led to the growth of crowd funding and P2P lending, then to the growth of the alternative sector with challenger banks, and now in a more agile and potentially entrepreneurial format the emergence of the small boutique lender backed by institutional capital.