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Builders Finance Fund: does it help SME housebuilders?

Chancellor George Osborne announced the £525m Builders Finance Fund amid much fanfare in the Budget. The scheme aims to help small housebuilders kick-start stalled projects – but with a minimum of 15 units required to qualify, has the government excluded the very companies it is trying to help?

It’s fair to say that housing has been one of the brightest lights in the emerging economic recovery.

Although political debate has focused on a shortage of housing, particularly at the affordable end of the market, most of the big housebuilders have reported significantly increased profits this year.

But while big companies are enjoying success, are smaller builders being left behind?

The National House Building Council recently revealed figures that showed a 7 per cent increase in the number of new homes registered during Q1 2014 to 33,816, compared with 31,739 during the same period in 2013. This is, however, still well below the peak level of 53,504 seen in Q1 2007.

NHBC panel members acknowledged that more still needs to be done to increase the supply of housing in the UK – and they recognise there are still barriers facing SMEs who want to operate in this market.

Budget for small builders?

George Osborne’s Budget back in March promised to “take further action to boost housing supply” by “creating a £500m Builders Finance Fund to provide loans to SME housing developers”.

This fund opened for bids on 14 May and builders will need to submit expressions of interest before noon on 25 June.

“Access to finance has been a major issue in restricting SMEs’ ability to increase the output of new homes. But the lower threshold of 15 units is disappointing”

Andrew Dixon, Federation of Master Builders

The fund’s prospectus states that “the programme is intended to address difficulties in accessing development finance faced by some housebuilders, particularly smaller developers”.

Funding is for developments that have slowed down or stalled completely – but, crucially, it is only available to schemes between 15 and 250 units in size.

The Federation of Master Builders welcomes the fund but has some reservations about the lower limit of 15 units.

“It’s certainly welcome – for SMEs, access to finance has been a major issue in restricting their ability to grow and increase the output of new homes,” FMB policy executive Andrew Dixon explains. “But the lower threshold of 15 units is disappointing.”

SME’s BFF disappointment

Nottingham-based builder Swan Homes was considering putting a number of bids forward for the fund.

“We welcome the fund and were incredibly interested – but to say I’m disappointed in the 15-unit threshold is an understatement,” managing director Adrian Swan says.

“We spoke with the government and said that an ideal threshold would be five homes. If you look at the number of schemes between five and 10 homes, they are all over the country and there’s a huge opportunity there.”

“To say I’m disappointed in the 15-unit threshold is an understatement”

Adrian Swan, Swan Homes

Mr Swan explains that his company had four developments of 10 to 12 units that fit all the scheme’s criteria and would have been ideal candidates – except, of course, that they fall short of the threshold.

“Over the last few years we have made use of private equity and investors, but they usually require a substantial return,” Mr Swan says.

“The banks have also been relatively helpful for what we have needed to do on some of our developments. But this scheme could really unlock a number of others and it’s a huge missed opportunity.”

Lessons from past may lower BFF threshold

The upper limit of 250 units has also been called into question, with both the FMB and Mr Swan arguing that “no small builders” are carrying out developments of that size.

Both hold out some hope, however, that the limits could indeed be lowered to five units.

“I would hope that if take-up for BFF is limited, as I suspect it might be, then the threshold will come down”

Andrew Dixon, Federation of Master Builders

“If you look at the Get Britain Building programme, it wasn’t terribly successful and it initially had a 50-unit threshold. That was lowered over time,” Mr Dixon reflects.

“I would hope that if take-up for BFF is limited, as I suspect it might be, then the threshold will come down.”

Part of the problem is the administrative burden required to administer the fund. The Homes and Communities Agency was concerned that a lower threshold would lead to far more applications, leading in turn to higher levels of administration on their part.

Need for housebuilder market balance

But, of course, there is a balance to strike and the fund needs to be available to those builders who need it most.

“Those who most struggle to access finance are those microbuilders who build schemes of fewer than 15 units – maybe only five at a time, 20 to 30 per year,” Mr Dixon explains.

In the last 25 years, the number of SMEs contributing to Britain’s housing stock has plummeted.

“It used to be that 66 per cent of homes were built by SMEs; now that’s down to 31 per cent,” he says.

“The key to achieving more homes is access to finance – this is a good policy step but it’s clearly not ticking the right boxes”

Adrian Swan, Swan Homes

“In just the last five years, the number of operators building 1 to 10 unit schemes has fallen from 10,000 to 2,480. Those building 11 to 30-unit schemes has dropped by 68 per cent.

“We can’t go on losing those firms if we want to increase the amount of housing in this country.”

Mr Swan echoes this view, saying that the government just “needs to do the simple maths” to get an extra 20,000 homes.

“If you have 1,000 SMEs building 20 homes a year you hit the target very quickly,” he says. “The key to achieving it is access to finance – this is a good policy step but it’s clearly not ticking the right boxes.”

Housebuilding election ‘battleground’

The NHBC said it believed that SME growth could become an election “battleground” for political parties this year as they all look to boost housing supply.

“We certainly hope that will be the case,” Mr Dixon says. “We would like the government to keep this scheme under review and to look at the threshold again.

“Currently, we’d expect only about 10 to 15 per cent of our members to be able to apply, so there’s clearly room to do more.”

Major housebuilders may be booming at the moment, but it’s important that SMEs are not left behind. Government programmes such as this, and others like Help to Build, can play an important role in helping smaller companies access the finance they need to grow and build.

Above all, however, those that need the finance most must be able to access it – and there’s a danger that if the Builders Finance Fund remains in its current form many SMEs will miss out.

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