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Housebuilding needs SMEs and the financiers that back them if we are to build the homes the country needs. Rupert Bates talks with Oliver Thompson of Quantum Development Finance and Paul Henry of Esquire Developments.
We didn’t touch the croissants, freshly baked that morning. When a lender and a SME housebuilder are in a room there is too much to talk about to pause for breakfast. It is easy given the state of the market, the huge uncertainty in both domestic and global economies, and the pressures assailing housebuilders from all sides, to sit and moan. But Oliver Thompson, CEO of Quantum Development Finance and Paul Henry, managing director of Esquire Developments, sat in the showrooms of the Halcyon kitchens in London’s Wigmore Street and sought solutions. Okay, they might have justifiably moaned a little too, but while everyone is in a hurry to turn the tanker that is the UK housing market around, the lead takeaway from their conversation was to address the problems in bite size chunks to find the answers. Bite size is what SMEs do best.
They leave the full English breakfasts to the volume caterers, but the government, if it has any chance of getting remotely close to its wildly ambitious 1.5m new homes target in this parliament, needs a balanced diet of delivery and the best SMEs, with the best funders behind them, have the raw ingredients. The relationship between Quantum Development Finance, on track to fund £750m of new housing this year, and Esquire Developments, an award-winning design-led SME housebuilder based in Kent, is not only a thriving one; it should serve as a template for smart thinking and shared vision – a true partnership.
Quantum focuses on bespoke finance, flexibility and, with its in-house investment committee, fast decision making. It is a true relationship-led lender. Esquire continues to grow and, having won gold for Best Small Housebuilder at the 2020 WhatHouse? Awards, took bronze in the Best Medium Housebuilder category last year. Founded in 2011, Esquire currently builds around 120 homes a year. Despite its ambition and pipeline, Esquire, like many of its peers, is very aware of the slower sales market and lack of mortgage affordability, as well as uncertainty around costs, exacerbated by housing associations’ lack of appetite to acquire S106 units, which is severely impacting the ability to even start onsite without that comfort blanket in place.
Esquire has always focused passionately on product, placemaking and design, while some developers, out of Covid, when the taps were turned back on, looked to cut costs and value engineer, leading, said Henry, to less premium products, but at premium prices and in locations they don’t necessarily suit. Thompson believes a byproduct of both mortgage affordability and buy-to-let investors exiting the market, pushing up rents, is the traditional first-time buyer apartment rung of the housing ladder, getting thinner, with nothing to unlock the bottom of the chain. “Recent data from Zoopla indicates that first-time buyers are increasingly likely to skip the traditional apartment purchase and wait until they can afford a house.
There is no doubt that all of the costs associated with moving are linked to this as well as affordability, meaning the average age of first-time buyers is increasing,” said Thompson. While Henry welcomes the government ‘build, build, build’ rhetoric, the bold numbers don’t have to translate into huge schemes to hit targets and thus increasing the dominance of the major players, who can sit on capital and absorb planning delays if building out quickly does not make commercial sense at the time. Combining the power and the quality of the smaller players on the pitch can lead to quicker wins in terms of speed of supply. Such are the hurdles, no matter how big a pair of scissors government claims it will take to red tape, very few large schemes will hear the roar of the bulldozer before this parliamentary term ends – and we know how much politicians love to take the credit while available.
“In theory, it seems easier to unlock a huge site of several thousand homes, but if you want to get schemes built and sold in a five-year window, go for more smaller, lower density sites of say 30 to 100 units,” said Henry. This is where, said Thompson, it is vital to support the growth of a shrinking pool of existing SMEs, some of whom, with a fair wind and strong funding partnerships, can potentially double or triple output over two to three years. “And because of where and what we build, that growth supports local tradespeople and delivers for local communities,” said Henry. That also requires planning reform, bypassing amateur committees when it comes to smaller sites, allocated, policy-compliant and with outline permission, that not only deliver on price, product and design, but can also, said Thompson, “unlock more unconventional sites that enhance local communities, which the volume developer is not interested in”.
Back to registered providers – a huge block to SMEs, for what RP is going to settle for a handful of units attached to the smallest sites? And those that do go in with lower bids, currently preferring to prioritise the improvement of their existing stock. “There needs to be a solution to this right now. It is all very well pumping another £2bn into the Affordable Homes Programme, but that is for additionality. We need that grant on live sites,” said Henry. “With ever tighter margins, we require certainty. SMEs are happy to build affordable homes as they de-risk the site and help with cashflow. But we also have to deal with different policies across different local authorities. Some authorities are shining stars, engaging and understanding the issues. Other take a ‘computer says no’ approach and committees come with pre-conceived views.”
Subjective objections are a nationwide problem, said Thompson, with schemes knocked back despite ticking every box – and those boxes are many and costly – put in front of the developer. The impact of this on an SME developer is too often overlooked. The local pub analogy is a familiar one. The councillor, who voted to refuse the housing development next door, gets bought drinks, while the pub landlord, not to mention the village café, would have welcomed new patrons. The middle-aged couple in the snug wear smug grins as another pesky housebuilder is chased off the premises, while bemoaning the fact that their 30-something children, with average house prices now around eight times earnings, still live at home.
There is a culture, not just bureaucracy, to overcome. “When it comes to public consultations and engaging with local communities, it is invariably the younger people who ask the best and most proactive questions these days, such as what will you do to improve the local school, what is the design of the homes like, what are your environmental values. The older generations often simply don’t want change,” said Henry.
“Quite often we see the children of objectors buying our sites, as well as objectors at the outset, who admit on completion that the homes are great.” A walk round an Esquire development, said Thompson, is to see character and quality; a genuine enhancement of the local area, while respecting the vernacular and feeding demand. Henry said that many SMEs don’t just have the benefit of local knowledge; they are the locals. “I have played football in Kent from the age of 10 right through to men’s teams. I have kicked a ball across most of the county over the years. I know the areas where we build intimately,” said Henry, who was instrumental in the formation of the Kent SME Developers Network in 2019. “I live there, I walk the dog there, I go to the pubs and restaurants. I know what good looks like, and I know what the local concerns are. Road congestion? I know, I’ve sat in that traffic.
We understand the issues but have the solutions to mitigate them.” Thompson agreed, saying the majority of Quantum’s clients develop local to their offices, which clearly offers distinct advantages. “They know the demographics, understand the residents’ needs and would proudly walk into the local pub. You cannot hide or get away with building poor quality housing on your own doorstep.” Henry said reputation and trust is everything, doing what you say you are going to do. It’s good for business too and every local landowner whose hand you shake and promises you keep, means another hand will be extended locally for another potential scheme. Keep your word and word of mouth works does the rest.
To drive the flagging market, Thompson and Henry both agreed there needs to be a demand stimulus, pointing to the benefits that the previous Help to Buy scheme had on the market. Traditional entry level one-and two-bedroom starter homes are now largely unattainable at the age young people look to access home ownership, and so when it does come within reach, the age cohort may be married with a young family and looking at, for instance, three-bedroom properties instead.
“The government focus on supply side incentives is welcomed and it’s positive to see housing at the top of their agenda but easing the drivers of supply won’t improve the build rate if there isn’t the market confidence to support demand. We need something to support first-time buyers and ease affordability. In certain parts of the south-east and south-west the demand supply imbalance has shifted, so without supporting demand, developers won’t have the certainty to build at pace,” said Thompson.
Henry and Thompson discussed new investment models to unlock equity solutions on the buy side as well as new funding models for developers that would allow enhanced scale at SME level. “There is no shortage of liquidity in the market and there are still few better places to put it than in the UK residential market,” said Thompson, also advocating rent-to-own models.
Henry may have covered most of the pitches of Kent, but nationally the housebuilding industry needs more Henrys on the pitch, helping SMEs, currently in total delivering around 12% of all new homes, now building say 50 units a year each to get to 200, and taking away the pain of cashflow to fund the next opportunity. “A SME housebuilder, often the owner/driver, shouldn’t have the headache of worrying about the finance day-to-day. They need funding models that are simple, transparent and repeatable; somebody across the table, but on your side, a partner as well as your lender, understanding the business of housebuilding. That is where Quantum is positioned with the likes of Esquire, solution-driven, offering flexibility, speed and certainty,” said Thompson.
By now it was too late for breakfast, but time for a quick tour of the rest of the Halcyon Interiors showrooms, including admiring the Fisher & Paykel oven used to bake the croissants. After all, a builder, like a baker, needs dough – stretched or otherwise.
