Look to tax-efficient investment schemes

Creative solutions like this could be the key to unlocking potential in the property sector.

Look to tax-efficient investment schemes

Jamie Johnson (pictured) is chief executive of FJP Investment

British cities from London to Manchester have seen remarkable changes in recent decades, with the majority of this revitalisation being driven by the construction of commercial and residential new-builds.

The goal at the heart of these development projects is two-fold; for one, property developers aim to bring economic and cultural improvements to the UK’s towns and cities. But underlying this secondary goal is the pressure to deliver enough suitable housing to meet the growing needs of the population.

Having worked closely with small and medium-sized property developers, I have seen the many challenges they face when taking on new projects.

The repercussions of this cannot go unnoticed – SME developers are crucial for helping us solve the housing crisis.

That is why I am urging the government to divert more attention towards supporting the nation’s smaller developers and employ creative solutions to help them overcome the challenges they face.

Already, steps have been taken in the right direction; earlier this year, the British Business Bank launched the ENABLE programme, which will make available up to £1 billion of guarantee support for smaller housebuilders via specialist and high street banks.

Given the urgency of the housing crisis however, positive efforts like these must be supplemented by further innovative measures.

The housing crisis – how far have we come?

The housing crisis has long been on the government agenda, but how much progress has been made towards restoring balance between supply and demand?

Let’s divert our attention to some recent figures to see how far off the UK is from providing enough affordable and accessible housing.

As is stands, estimates have put the number of new homes needed in England at between 240,000 and 340,000 per year.

That’s a tall order to fill for the country’s housebuilders, particularly as in 2017/18 the total housing stock in England increased by around 220,000 homes – falling short of the ambitious target.

While housebuilding efforts have certainly been ramped up, the figures suggest that much more needs to be done to ensure we can reach this target.

This must start by supporting the nation’s smaller housebuilders and restoring their confidence to take on new projects.

Trouble accessing finance

If you were to ask SME developers what their main obstacle is when it comes to delivering new-builds, the majority of them would say access to finance.

Indeed, in a survey 57% of small developers identified this as their biggest impediment when taking on new projects.

This general trend has taken hold since the 2008 financial crisis; a time when mainstream lenders became more risk-averse when approving lending applications and adhering to a rigid approval process.

While this industry-wide shift in attitude is predictable, it has left many SME developers in a difficult position.

Limited access to finance through traditional avenues is particularly burdensome for smaller business. This has forced many developers to rely on project finance, which is agreed on a site-by-site bases.

According to recent statistics, most SMEs building fewer than 100-150 homes per year currently go down this route despite the drawbacks, which include significant additional fees for entry, exit and legal agreements.

Do tax-efficient schemes hold the answer?

Given the current climate of uncertainty and the continued reluctance of lenders to lessen restrictive criteria, is there an alternative solution which could open up new avenues to finance?

One answer lies in promoting tax-efficient schemes, which have already seen success in other areas of the private sector. By this, I am referring specifically to the Enterprise Investment Scheme (EIS).

Created by the UK government to encourage private investment into startups and early-stage businesses through tax incentives, this initiative has played a vital role in helping UK become a capital for entrepreneurship.

The numbers here speak for themselves; since the scheme was launched in the 1993/94, nearly 30,000 companies have received investment through the EIS and over £20 billion worth of funds have been raised.

Could a similar tax-efficient scheme that promotes private investment into developers hold promise?

Currently, SME housebuilders are precluded from accessing initiatives like this, but what if we could open up access to give smaller developers the capital boost they need?

Incentivising private investors to direct a proportion of their capital to SME developers through tax incentives would widen the pool of finance available, and ultimately help them get housebuilding projects off the ground.

To ensure that the UK can effectively support the housing needs of the population in the long-term, it’s imperative to consider such reforms while the opportunity presents itself.

Creative solutions like this could be the key to unlocking potential in the property sector and helping SME businesses deliver more quality homes across the country.