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Wellesley Finance makes loans solely to businesses (these business loans include but are not limited to business development finance, business buy-to-let, and first/second charge loans for business purposes). As a result, these loans do not have the benefit of the protection and remedies that would be available to you as a consumer in the context of a non-business loan. Wellesley Finance is not permitted to undertake retail loans to consumers. If you are a retail consumer seeking a non-business loan, you should not seek to obtain a loan from us. Business loans will be secured on relevant assets and these assets are at risk in the event of the loan being in default. A property asset may be repossessed if repayments are not kept up on a loan or other asset secured on it. If you need advice on any of these matters, or you are in any doubt as to the consequences of taking out a loan with Wellesley Finance (including not being regulated), you should seek independent advice from an appropriately qualified professional. Wellesley Finance recommends that you consider whether a potential business loan meets your own creditworthiness, risk levels and objectives. You should be seeking to borrow funds only if you believe that your business activities are capable of repaying those funds and that you have considered the required repayments in relation to your other financial commitments.

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An additional 300,000 houses per year, is it possible?

December 6, 2017

The Chancellor’s recent statement that the government wants to see 300,000 houses built every year has already attracted considerable commentary. The recent budget changes to stimulate the UK housing market are a clear sign that there is considerable political will to make this a reality, however is this an easily achievable goal?

1969-70 was the last time 300,000 permanent dwellings were built in a single financial year in England. Since then, annual build volumes are on a steady downward trend. According to the BBC, since 2010 the average volume of new dwellings built per annum is 122,704.

According to the Office of National Statistics 80,070 permanent dwellings were completed in England in the first half of 2017. If we extrapolate that across the full year it suggests that 160,140 dwellings could be completed for the full year. This is only 53% of the government target. In short, residential construction in England needs to increase by 90% if we are to achieve the target of 300,000 homes.

Residential development requires a number of critical inputs: availability of land; provision of appropriate planning permission; availability of financial resources; availability of raw materials; availability of skilled labour; and competent developers. Much of the commentary to date has focussed on the first two inputs, land and planning. The new compulsory purchase powers granted to the Homes & Communities Agency (HCA) are a clear signal that there is the political will to address any shortfall of these key inputs. However, what about the other inputs? In particular, does England have sufficient pool of development finance and skilled labour to support an almost 90% increase in construction activity in the sector?

In October 2017, the main High Street Banks had £20.9billion of outstanding loans to UK residents for Construction. The construction of domestic buildings accounts for £3.2billion of this. Between February 2011 and October 2017, lending from High Street Banks for the construction of domestic buildings shows a cumulative reduction of £2.2billion, which represents a 40% drop in their exposure to this sector. This suggests that any increase in financing will need to come from the Challenger Banks and Non-Bank Financial Institution sectors of the lending industry.

In September 2017, the average price of a house in England was £243,945. Assuming the creation of 140,000 new dwellings is evenly distributed around the average, this implies an increase in housing stock worth £34,152,300,000. Yes, £34.1billion additional housing stock per annum. We can safely assume that the average cost (land and construction) of this housing stock will be 60-65% of the value. Even if we take the lower number this implies that the cost of building this additional stock is approximately £20.5billion. Does England have this level of available additional development finance in a backdrop where the High Street Banks are collectively reducing their exposure to the sector? Even if the answer to the previous question is positive, how much additional skilled labour is needed to build 90% more houses each year? Many of the developers financed by Wellesley are already commenting on increases in the day rates for bricklayers, carpenters, electricians etc. Many experienced tradesmen left the construction industry post the 2008 financial crisis, as a result of the contraction in construction activity. Having established themselves in other careers, most have not returned. At a time when those skilled tradesmen already in the industry are very well deployed and Brexit is arguably creating an environment where overseas labour will be less likely to migrate into England, the lack of skilled tradesmen could be the single largest impediment to achieving the government target.

In September 2008, there were 2.3million people employed in the construction industry within England. Numbers started to reduce by June 2009 and reached a low of 2million in June 2013, an almost 14% reduction. While numbers employed in the industry have started to climb back up to 2008 levels (June 2017 shows 2.3million), the skill levels of the new entrants is typically lower than those who left. Hence there is still a need to sharply increase employment levels within the industry in order to support a large increase in production activity.

It will be interesting to see if the government tries to directly address this issue by encouraging more apprenticeships. However, with an unemployment rate of 4.3% there are many other career opportunities available to school leavers which could mean that the construction industry struggles to meet the increased capacity implied by the government target.

So, on one hand we have political will and government policy supporting a considerable increase in residential construction within England. On the other hand, we have critical inputs (development finance and skilled tradesmen) which may not be available in the near term in the quantity required to support the targeted increase. Despite there being a number of factors to play out, Wellesley’s decision back in mid-2016 to focus on units valued at £300,000 or less and to view houses over £600,000 as an exception is clearly aligned with government policy. Also, our core strategy of supporting quality regional developers means that we are well positioned across the stronger regional markets.

- Paul Murphy, Head of Credit