Tackling the Housing Crisis with Development Finance

UK Housing Market

Brexit has been dominating the headlines now for years, shadowing topics such as development finance, and it has had a rippling effect across most of the UK industries, particularly the financial sector.

We have seen both political and economic uncertainty bring uncertainty to the market, but also opportunity. Investors have acted on this to explore alternative markets that are offering better returns. Perhaps the biggest reason for the shift in investor behaviour is the continued low level of interest rates, remaining at 0.75% since August 2018.

The rise of development finance

One such area that is seeing a rise in investment is development finance. Investors are seeing the benefits in the reliable returns and also the fact the money goes further. Investors are seeing greater returns and often over a shorter period of time.

The benefits of these investments extend beyond investor profits. Investors are providing opportunities for property developers to build housing for those that need it. By doing so, more housing is being created for the right demographics, easing pressure across the economy and mitigating the damage of a housing crisis. With Brexit in particular having a damaging effect on new-builds, development finance will quite possibly be the stabilising force the sector needs.

The problem the market is facing however is a lack of awareness. Not just amongst investors but also consumers, many are unaware of the financial and wider economic benefits an investment in this field provides. More specifically then, how does development finance offer these benefits?

The benefits of development finance

As you can probably guess, property development finance is a form of loan used in the property development process. This can be used for refurbishing existing housing to building new developments from the ground up.

Loans of this nature are typically short term and have a re-defined exit strategy. With returns high and over a reduced period of time, many investors are focusing on this investment through the uncertainty in which the long term brings. One form of development finance seeing particularly high levels of investor activity are debt investments.

Here at FJP Investment, we have seen an increasing number of investors turn toward debt investments. In fact, 30% of investors we surveyed from a sample of 950 verified UK investors said they are interested in turning to debt investment due to the regular, high level, fixed returns.

Loan notes have a pre-determined date of maturity, one of the significant benefits of this method of investing. Investors do not need to worry about when they will get a return on their investment or track it carefully, returns are given at a date of maturity agreed before the investment is made. The capital is paid upfront to the developer and returned at an agreed time with interest, sometimes as short as 12 months.

What are the benefits of development finance to the housing market?

Brexit has been dominating the headlines now for a few years, yet the unresolved housing crisis continues to persist, much beneath the surface. According to forecasts, the UK needs to produce 300,000 new homes for the next five years to mitigate the effects of a housing crisis. Currently, and for the past few years, we have fallen significantly short of this target.

The biggest reason for this shortfall in development is the difficulty that property developers face when trying to obtain finance.

Particularly relevant for SME developers, the difficulty in obtaining finance from conventional bodies such as banks is causing a shortfall in new-build projects. This comes as a result of the 2008 financial crisis, where lenders became more risk adverse through the financial crash in the market. In fact, over half (57%) of small developers identified access to finance as the biggest hurdle that they face.

The level of supply being blocked and with a high level of demand, the market is in desperate need of alternative finance sources, this is where development finance can truly fill the gap. The financial instrument allows developers to access private finance to construct more homes, helping the wider public. The source of finance is often more flexible for developers over traditional lenders, too.

Development finance can also be used to utilise existing stock to make the most out of existing homes and structures. For the purposes of regeneration from sites in a derelict state, this really is a case where everyone wins.

In the real estate sector, we should be turning our attention to development finance. With a further 20% of investors surveyed planning to move into the market in the next 12 months alone, many investors are making the move.

Housing Market Crisis

Undeniably, the UK is in a housing market crisis. This stems simply from the old age problem of there not being enough supply to meet the demand of those seeking such supply. How do we go about fixing this and where do we start is the big question.

There first of all needs to be incentives for those to downsize. It should be championed and encouraged. Naturally, the cycle goes of life goes with us upsizing our property as our family grows. But, what happens when everyone has left home and Mum and Dad are all alone in that 4 bedroom house? The big discouragement for them to move down in size is the taxes and stamp duty they would pay and therefore they’ll stay put.

I personally don’t see a massive need for too much property but instead I see a real need to encourage moving throughout the existing stock.