Launched last year, the Home Building Fund (HBF) is an example of government responding to feedback about previous funds. Custom Build Strategy gives you seven reasons why it’s such a pivotal fund for the custom build sector.
The main barriers to custom build have been identified as finance, land and planning red tape. The Home Building Fund is the government’s solution to developer-led finance, helping to bring about change in the housing market.
Tom Hustler, spokesperson for the Homes and Communities Agency, which administers the fund said: “At £3bn, the Home Building Fund is a statement of how serious this government is about doing something different and better to help solve the housing crisis.
“It’s not repackaging existing funds, it’s completely new. It’s a very real commitment to change things, and the fact that custom build features significantly is an acknowledgement that it’s not all going to be done by the big builders.”
The fund effectively sweeps up and replaces previous funds, such as the Custom Build Homes Loan Fund, Builders Finance Fund and the awkwardly named Custom Build Serviced Plots Loan Fund.
These were criticised for being prescriptive and hard to apply for, resulting in rumoured low levels of SME lending.
There are two major lending streams in the Home Building Fund: development and infrastructure.
Development Finance – To meet the development costs of building homes for sale or rent
Infrastructure Finance – For site preparation and the infrastructure needed to enable housing to progress.
Most custom builders will be focussed on the development funding, which represents £1bn in short-term loan funding to bring on 25,000 homes, with a typical 5 year repayment term.
However, custom build can also benefit as part of a larger scheme that uses the infrastructure finance. An example of a similar project was the sale of HCA land in Doncaster, where the HCA put in a spine road, infrastructure that helped bring on a development that includes Keep Moat, Strata and custom builder Fairgrove Homes, all on the same site.
Government is aware of the amount of SMEs that have left the market, or feel that they operate under unfair conditions in comparison to the volume housebuilders. The HBF specifically targets SME builders and developers, as it actively wants to promote them to bring on more housing.
This predisposition to the small also enables the fund to lend to new entrants that high street lenders would identify as a risk.
Consequently, if the HCA is happy that a scheme is viable and the applicant trustworthy, it will lend to new start-ups that would otherwise not get the opportunity.
Its focus is the building of more homes, so it will weigh up a lack of track record as a developer, and balance this with overall experience and reliability.
“We’re happy for start-ups to demonstrate their viability through development plans, cash flow and the land they hold, for example, as a basis for a loan. Effectively, we’re lending to innovators, and these in turn may become the next generation of SME developers,” says Hustler.
For example, the fund has been used to finance a small site being brought on by a SIPs builder, which up to this point has only built houses for other developers.
In its pack, the fund says it wants to encourage innovation both in kind of homes and infrastructure. A key aspect of this is custom build, which is identified by the fund as a special case. As such, it is the only route that it will lend against below the £250,000 minimum loan value, depending on the case.
“We acknowledge that custom build can be different, so we’re prepared to lend smaller amounts to them as we know the stakeholders are not always in a position to warrant the larger levels of money, although we want a five-home minimum, ideally. But again, if you’ve a four house scheme that’s perfect for its site, we could be flexible.”
Application to the fund is, for a government-led initiative, insanely simple and human. The HBF dispenses with the huge prospectuses filled with legal hoops that dominated and restricted previous funds.
Previously, complicated procedures meant that only large housing associations and the like were sufficiently resourced and experienced to make applying worthwhile. This more or less prevented SMEs from applying, cutting them off from a funding stream.
Instead, the current application process relies on a web-based registration of interest, which asks just five questions. From this point, a transaction manager will call you back to go over your application.
“All we ask is that you own some land, or have a legal option on some, and that it is reasonably likely to get planning, that is, is it in your local plan and is identified as part of the five year land supply,” says Hustler.
Check out out Custom Build Strategy’s Home Building Fund infographic for the initial five questions.
Hustler says: “The Home Building Fund is designed to be flexible. We don’t have one single model of ‘this is how to bid’, and we don’t have a single model of type of loan.”
The fund isn’t designed to replace traditional high street funding streams, but rather step in when conventional commercial funding, which tends to be cautious, isn’t an option. This means it is open to applications that are beyond the remit of regular finance institutions. “We facilitate a more diversified route to housing,” he adds.
“We’re looking for additionality that brings extra coverage to the market beyond the banks,” says Hustler. “These have been more cautious since the financial crash, and also work to sector or geographical targets that they can often easily satisfy.”
Another significant plus point for the fund is the fact that not having one single model means that individual packages can reflect individual circumstances. The HBF has advanced funding with a range of payment arrangements.
For example, one project was allowed to roll up its interest charges until housing receipts from sales created an income stream, while a different project borrowed on a peak-cash-flow model to enable the company to get a show home built, which would trigger sales.
“We only lend to the housing sector, so can afford to be more flexible,” says Hustler. “It’s all about trying to get more houses, more quickly. Essentially, we aim to get additional homes built out that otherwise wouldn’t make it off the drawing board.”
Because the big lenders can easily satisfy their business needs in the wider market, they don’t often need to invest in more unusual developments. They perceive these as more risky when measured against their more stringent lending criteria.
Consequently, the HBF has been set up to be far more open to unusual and innovative schemes. This is especially so, if they chime with government goals for diversification. As highlighted in the White Paper, these embrace non-standard methods of construction, such as offsite, quick routes to delivery and innovative processes like custom build.
Speed of delivery is key, as the fund, which runs to 31 March 2021, aims to have all the homes its lent money to bring on completed by 2021-22.
Unlike previous schemes, the HBF has a simple process to enable it to quickly make finances available for drawdown.
It aims for 100 days from application to availability, with a record of 87 days for one project, although the case by case nature means timings will vary.
Since its creation in October 2016 it’s had over 1,000 enquiries, with 120 applications completed already, 90 of which are in due diligence. About 100 of the enquiries have been from companies intetested in using the loan to deliver custom build homes or serviced plots.