The UK’s levelling up agenda seeks to improve economic dynamism and foster innovation to drive growth across the country by unleashing the power of the private sector. A key component of this initiative is the regeneration of residential areas, as well as the provision of housing. Private investors have the opportunity to make an outsized difference at the mid-size developer level where funding gaps hamper productive capacities. 

The shortage in the residential property supply across the UK has led to high levels of demand with the May 2022 OnTheMarket (OTM) Property Sentiment Index revealing that 82 per cent of home sellers were confident of completing a sale within three months. Moreover, the national average of homes Sold Subject to Contract (SSTC) was 63 per cent within 30 days of first being advertised for sale. 

To satisfy this market need, property developers must procure significant financial resources to build quality homes. The prototypical capital mix entails a combination of leverage, approximately 70 per cent provided lending institutions like banks, and mezzanine or equity funding which comprises the remaining 30 per cent. 

For larger developers, scale enables deployment of larger capital pools that investment vehicles, such as private equity, will participate in and fund. For smaller developers, there can be greater reliance on personal networks to get deals over the line. However, as they grow, this becomes less viable and a funding gap emerges in the space between the friends and family equity level, and the institutional capital equity level. 

This inefficiency in funding allocation at the mid-level creates significant opportunity for private investors, which can participate through mediums such as forward funding arrangements, to capitalise on the specific advantages highly experienced mid-sized developers are able to offer before reaching scale. 

“OTM data reveals that in April, 82% of sellers were confident that they could complete a sale within three months, which is the same percentage as in March and February 2022, with some regions even reporting an uptick in confidence.”

https://propertyindustryeye.com/housing-supply-improves-as-the-market-starts-to-slow/ 

References

• https://propertyindustryeye.com/housing-supply-improves-as-the-market-starts-to-slow/ 
• https://www.lgcplus.com/politics/devolution-and-economic-growth/andy-street-private-sector-is-the-real-determinant-of-levelling-ups-success-20-05-2022/ 
• https://www.propertyinvestortoday.co.uk/breaking-news/2022/5/why-private-investors-are-crucial-to-the-governments-levelling-up-ambitions?source=newsticker 
• https://www.gov.uk/government/publications/levelling-up-the-united-kingdom 
• https://www.lvproperty.co.uk/blog/housing-supply-improves-as-the-market-starts-to-slow/ 
• https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1052046/Executive_Summary.pdf