An online platform created to “drive the revival” of SME housebuilders by offering instant sales guarantees and development finance has issued £600m worth of proposals in its first three months.
Launched in January, LDS underwrites the financing of development sites and agrees to buy any unsold homes upon completion, thereby removing speculative and exit risks for SME housebuilders. The scheme also offers development finance by releasing 10% of the guarantee value to the housebuilder, unsecured and with no interest.
LDS has estimated that the increased leverage and funding reduces housebuilder cash contributions by an average of 77%, which it said would “completely transform” viability. The company also estimated that a typical £10m GDV scheme would see a 170% increase in returns on cash invested.
In the last three decades, the share of homes built by SME housebuilders has plummeted from about 40% in 1988 to about 10% in recent years. The dearth of SME developers, driven in part by a lack of financing options, has exasperated the UK’s shortfall in housing delivery.
According to the Federation of Master Builders, 41% of SME housebuilders cited a lack of finance as one of the main constraints on supply in 2020. A third said lending conditions had deteriorated from the previous year (53% reported they had stayed the same), while 42% had been involved in sites that had stalled for financial reasons.
The goal for LDS is to underwrite £4bn of proposals this year. Between January and March, it issued £603m of sales guarantees to 67 sites, consisting of 1,551 new homes across England and Wales, ranging from 10-59 homes with GDVs between £3m-£38m per site
One recipient was SME housebuilder D T Joseph Developments, which received a sales guarantee and a £424,656 cash injection from LDS to fund the development of 16 new homes with a GDV of £6m in Ramsbottom.
As part of the Landmark Group, which has a £150m portfolio with close to 20,000 tenants, LDS retains the homes that it buys as long-term investments on a rental model basis. Meanwhile, for each home the developer sells on the open market, LDS takes a cut of the sale price.
Mark Hawthorn, CEO of LDS, said the response so far has given him “huge confidence” of meeting the £4bn target this year, adding: “The adoption of sales guarantees by the market is driven by simple facts – they remove risk, reduce cash requirements and increase returns. The compelling duo of higher returns and lower risks completely transform the viability of sites for both housebuilders and lenders, allowing much-needed new housing to be brought forward.
“SME housebuilders tend to build on smaller brownfield and infill sites in already-established areas, which hold huge potential for additional homes across the country. By helping them to unlock development finance and boost their output, we are driving the revival of the SME housebuilding market and helping the government meet its target to build 300,000 new homes each year.”
An iBuyer for developers?
Although LDS’s model is new in development finance, the idea shares some similarities with iBuyer products like Emoov. Promising customers they can “sell no matter what”, online estate agent Emoov gives them the option of a guaranteed offer, which means that if a customer is unable to sell their house within 30 days, they can ask Emoov to buy it.
Others, such as Immo Capital, buy homes directly from homeowners, refurbish them and rent them out on behalf of investors.
In each case, whether it’s LDS or an iBuyer, the companies take on some of the developer’s or seller’s risks by offering to buy the house if things go wrong. In the process, they take a cut of successful sales while also building up a portfolio of assets that generate a steady income.