As the UK battles with a housing crisis marked by a shortage of affordable homes for first-time buyers, the support of non-bank lenders could prove invaluable, writes Andrew Stoneman, head of Property Finance at investment manager Triple Point
The demand for housing in the UK exceeds the supply, a problem which has persisted for decades, exacerbated by a number of factors including a shortage of skilled labour, high construction costs, rising mortgage rates, double-digit inflation, and insufficient housing delivery. In 2022 alone, the value of construction work rose by £23bn, or 15%, from 2021. This has caused a spike in insolvencies, as firms struggle to pass on price increases.
Despite a moderate fall in house prices in early 2023, housing affordability remains a major issue. While the government promised to build 300,000 new homes each year by the mid-2020s, 2022 saw fewer than 200,000 registrations completed.
Cost pressures and labour shortages
With the UK government unable to meet its housing targets, smaller and medium-sized developers are in a prime position to help solve the housing crisis. However, these developers are currently facing a range of challenges, including supply chain problems, labour shortages, and rising material and energy costs. Access to finance at favourable rates is crucial if these developers are to deliver the scale of housing needed to meet the demand.
Since early 2022, the Ukraine war has added to a number of cost pressures for developers, complicating housing delivery. The price of materials has increased significantly, with double-digit inflation and high energy prices adding to budgetary pressures. The cost of materials such as cement, bricks, timber, and aggregates is slowly stabilising, but still at very elevated levels. These materials make up between 30-65% of any construction project, so price volatility can lead to major delays and unexpected costs for developers.
“While the era of cheap money looks to be over, it is uncertainty and volatility which acts as the biggest concern for developers budgeting for housing projects”
The shortage of skilled workers in the construction industry is another major issue. According to a survey by the Civil Engineering Contractors Association, over 70% of contractors have had difficulty finding skilled workers, the highest figure on record. This makes it difficult for developers to move forward with building projects in areas which experience the highest housing demand.
Volatile interest rates
Financial uncertainty is a key challenge for the industry. While interest rates have risen in response to inflation, many developers took out variable-rate loans during a period of low interest rates in 2022. This has resulted in unexpected costs for firms, making it difficult to plan for the future and hampering the construction of new homes. While the era of cheap money looks to be over, it is uncertainty and volatility which acts as the biggest concern for developers budgeting for housing projects.
While inflation looks to have peaked across a number of economies, bringing with it the likelihood of cuts to interest rates, the UK’s inflation figures remain stubbornly high. This puts further pressures on the Bank of England to keep interest rates at elevated levels, and a rate-cutting pivot looks far from likely at this stage.
Non-bank lenders stepping in
Non-bank lenders like Triple Point can help address the challenges faced by small- and medium-sized developers in the UK. While traditional lenders have increasingly withdrawn from the market, alternative lenders can offer specialised, targeted, and flexible financing at attractive rates. Non-bank lenders can also respond quickly to financing applications, which is crucial for developers who need financing on short notice.
Trust is vital when it comes to working with non-bank lenders. This is why private lenders excel at establishing long-lasting and close relationships with developers, enabling them to respond intelligently and quickly to changing conditions.
The UK must increase the supply of affordable homes to address the nationwide housing crisis. Smaller and medium-sized developers are well-positioned to help solve this problem, but they face a range of challenges that include material costs, labour shortages, and financial uncertainty.
Non-bank lenders can help address these challenges by providing flexible and targeted financing at attractive rates. With the right support, small- and medium-sized developers can play a critical role in increasing the supply of homes and making the housing market fit for future generations.
Image: Andrew Stoneman, head of Property Finance, Triple Point
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