Don’t rely on big house-builders to solve the housing crisis

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If you thought that the UK’s major house building firms were the answer to the chronic UK housing shortage, think again.  Recent statistics show that Britain’s leading developers are still building fewer homes than they were before the financial crisis (Daily Mail, September 2018).

Analysts at AJ Bell puts the figures for the big three at:

  • Persimmon: 16,043 homes last year and another 8,072 in the first six months of 2018, putting it on course to build 16,685 homes this year, below the 16,701 it built in 2006.
  • Barratt: 17,579 homes built in the year to July, but still below the 18,588 homes built in 2008.
  • Taylor Wimpey: 14,541 last year, down on the 14,862 homes it built in 2006.

Since the financial crisis, the UK population has jumped from 60.6 million in 2006 (ONS) to 66.6 million today, an increase of almost 10%. We now need to build at least 300,000 new homes per year to catch up. And it looks like the big fish in the UK building industry aren’t pulling their weight.

No wonder one of the most prominently touted solutions to dramatically increasing supply is to reduce the dependence on a small number of industry giants: “Rebuilding plurality in the industry would help bring about dramatic increases in housing output.” (Reversing the decline of small housebuilders 2017: HBF).

This is no easy task. With the financial crash, a downward trend in smaller UK house-builders was disastrously exacerbated. According to Stewart Baseley, Chairman of the Home Builders Federation, “we have lost thousands of SMEs during the last 30 years”. In the period 2007-2009 alone, one-third of small companies ceased building homes.

Research by the Home Builders Federation suggests that, if small builders were given greater support, they could make a big difference to the numbers. Returning to the number of home builders operational in 2007 could help boost housing supply by 25,000 homes per year. And even a return to 2010 levels could help increase output by 11,000 homes per year.

Bearing in mind that the Q4 2017 RICS Construction and Infrastructure Market Survey found that   only 12% of surveyors believed the UK will hit its 300,000 homes per year target in 2018, it certainly seems like it’s time to give better backing to smaller house-builders. And there are some interesting win-win routes to do that.

One of the major issues has been financing. Lenders’ experiences through the global financial crash have resulted in a drastic change in borrowing available to small builders for funding construction costs. But the current demand and the security builders can provide make this an attractive market for alternative lenders. And this is where you could benefit.

Participating in the new-build residential housing market doesn’t have to involve massive investment. Helping to drive the UK economy, while benefiting from the attractive potential returns could be within your reach, along with the potential for 100% IHT mitigation through Business Relief qualification.

One way to access these returns and the potential IHT relief is through Oxford Capital’s Estate Planning Service*. The Service aims for real returns by investing on your behalf in (among other things) loans to smaller, established UK house-builders to finance approved housing projects. It is available in subscriptions of £25,000.

Click here for more information on how you can back small, UK house-builders through the Oxford Capital Estate Planning Service.

 

* The Oxford Capital Estate Planning Service invests in unquoted companies.  Capital is at risk. Tax advantages are summarised based on current legislation. Tax treatment depends on the individual circumstances of each client and may be subject to change in future.

 

Estimated reading time: 2 min

 

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    1. If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
  2. You are unlikely to be protected if something goes wrong
    1. Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
    2. Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
  3. You won’t get your money back quickly
    1. Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    2. The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    3. If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    1. Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    2. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
  5. The value of your investment can be reduced
    1. The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    2. These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

 

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.