It is the Government’s stated aim to build 300,000 homes on average each year to solve the ever-increasing housing crisis. What resources will it take to do that? Land with planning permission, willing developers and necessary funding. The Government has already committed to releasing more land, particularly to smaller developers and is consulting with Local Authorities and developers on how to speed up the planning process. As to willing developers; there are plenty of great SME developers across the country with years’ of experience and schemes under their belt, ready and willing to take up the challenge provided that the other two elements are in place. The largest 16 housebuilders built 90,668 in the year to October 2017. Even assuming a dramatic increase in their activity they are unlikely to build more than 150,000 new homes between them. This would leave a further 150,000 homes to be built by the smaller SME developers. Relendex has seen at first hand the demand from SME builders to fund the building of new homes and the refurbish existing properties. We also know from lenders that there is appetite out there for investment loans on income-producing property. Government efforts to boost the housing supply are being choked by a squeeze on funding for small housebuilders, according to a recent Federation of Master Builders (FMB) industry study. It showed that 54% of small and medium-sized developers said accessing finance is a major barrier to building more homes. Almost 10 years after the financial crisis accessing finance is a major barrier for small house builders and is getting worse rather than better. This is despite Govt support through the £3bn Home Building Fund to help those firms with development and infrastructure.
The Government says that it will make available more funding but its conundrum is how to raise the necessary funding without raising the Government borrowing limits. We understand that Local Authorities may be given permission to borrow in their own name but does that really take the problem off the National Balance Sheet?
If SME developers are required to build 150,000 new homes, then assuming an average new build selling price of £329,000 across the country and a 70% cost of sales (land and construction) would mean a cost of £230,000 per home. The SME developer would need to fund 30% from his own resources and the remainder would require debt funding or £24billion. Of course a proportion of this funding requirement would be provided from existing sources. Many of these new homes could be acquired by Local Authorities, Housing Associations, other Government agencies and private buyers. So how could this funding be made available from a source other than Government borrowing?
Consider for a moment the following statistics. The market value of all ISA funds as at April 2017 was £585 billion. Cash ISAs represent 46% of that figure or £269 billion. A Cash ISA earns about 1% on average and the rate of inflation is currently running at 2.8% per annum. So for the privilege of enjoying a negative real return of 1.8% an ISA holder is enjoying tax free savings. Well what a bargain that is. And who gets to enjoy all that lovely cheap Cash ISA money? Ah yes, the banks. The problem is that because of their own Balance Sheet constraints, the banks don’t want much exposure to residential development, so that money is of little benefit in solving the problem here.
Then consider for a moment the Self-Invested Personal Pension (SIPP) market. There’s £100 billion tied up in that tax-free ‘product’ and nearly 1 million people own a SIPP. Fifty-year-old SIPP investors have 35% of the value of their pot (60 year olds have 50%) tied up in Fixed Interest products that pay returns below the rate of inflation. Saving for a comfortable retirement is really difficult for the average person. The search for respectable low-risk yields is constant and currently not achievable.
Imagine if you will, that just like in the old days, mutual Building Societies took in funds from savers and lent it to provide homes. The many-to-many model worked well for generations. What if there was a bit more joined up thinking out there that brought together Government, housebuilders and capital in a more constructive way? If we could unlock a small proportion of ISA cash and some SIPP cash, this could benefit all parties. The Government has already recognised that SME lending through Peer to Peer Innovative Finance ISAs (IFISA), is a way of bringing more funding into the nation’s small to medium-sized businesses, which includes SME housebuilders.
Is this risk free? No, it’s not but it represents lower volatility that Stock and Share ISAs and in areas where there is proven demand (and scarcity in many cases) for housing, the failure rate should be fairly low. A project that gets into difficulties would unlikely represent a total loss to investors. There would be a minimum of 30% cushion against any loss and investors could potentially be well diversified across multiple projects across the whole country, using managed IFISA products.
Once the completed homes had been delivered to a Local Authority or Housing Association, IFISAs could be used to provide long term funding of some of those homes, provided that the Government or Local Authority offered a suitable rental guarantee. Such a guarantee would protect investors but would not materially impact the Government’s/Local Authority’s overall commitments. And it would provide a low-risk, tax-free yield of say 4 or 5% to investors.
And as for SIPPs, there would need to be a rule change since SIPPs are currently precluded from lending against or investing in residential property. And would provide a respectable low-risk return to the retired or soon to retire SIPP holders.
I’m not suggesting that any investor group (ISA holder or SIPP pensioner) should put the whole of their savings pot into SME House Builder lending but 3% of the accumulated wealth of both pots (ISA and SIPP) would represent over £20billion of new tax-free lending capital to support this national endeavour and this capital could be recycled year on year. It seems to me to be a win-win for the nation, Government, housebuilders and savers. It doesn’t put new debt on the national Balance Sheet. It doesn’t unduly burden Local Authorities or reduce the tax take to the Exchequer. It creates the new homes the country urgently needs to avoid a threatening social catastrophe and brings new employment to all the industries associated with construction, equipment, materials, interiors, furnishings, professional services and design. I would welcome the opportunity to engage with the various agencies to bring this vision to fruition.
