The risk of lending to SME (& other) home builders.. and some politics!
Colm Casey
Co-Founder @ Homebuyer's Hero | A new platform backed by Enterprise Ireland to get housing supply pumping with buyers in control.
Here's something about risk for banks when lending to SME #homebuilders / #developers / #construction companies.
This is pulled from a tweet thread. (I'm @ColmCasey over there.)
Leo Varadkar , when I met you at the Scale Ireland event you'll remember we briefly discussed bank lending to SME builders - in fact you referred to it yourself, see video.
Ireland is a tiny market and we all know what happened 15 years ago.
Why aren't banks shoving out the construction finance money?
'Funds' as the near only source of finance for construction has been mentioned but a lot of that is a BTR model and there is *some* bank lending under BTS (build to sell). The BTR model of new homes creation, under current assessments of the site and product cost, isn't viable for BTS. Some capital available for BTS can be eye-watering but I guess "capital" will always take risk - at a price.
We also have Home Building Finance Ireland (HBFI) active (which is great) but think about it from a bank lender's perspective - since it exists, they want to use it as a mudguard and a canary rolled into one. *I would.*
But it is definitely slowing the roll in terms of building up a book of functioning projects for banks, to give confidence and an acceptance of risk in areas of the country at least which have what we might consider to be a reasonably functioning market and construction sector. Chicken and egg here.
Ireland is a small market still trying to restart
Did I mention that Ireland's market is teeny tiny? Lenders have to do things at some scale to even cover off mundane risks - it's difficult to get rolling. Why? Because the market is fractured up geographically. It's like a desert (where there is no data or even mirages like the Property Price Register (PPR) which contraindicate viability due to very poor insights / data at low volume) or oases of population and demand only some of which are considered viable under current (read: woefully inadequate) risk assessment processes, due to density, PPR reliance, etc.
Again, poor PPR data is very impactful, as well as volatility now in materials cost and again, general headwinds for the construction industry and a certain risk paralysis post 2008. Difficulties abound in spinning up at scale in resi construction due to risk loading & poor gearing available as lenders test the water in different geographies etc. We must also consider the risk appetite of people who saw industry colleagues taken out by the crash.
The Taoiseach can see the problem - listen here!
As the Taoiseach says in this video re lending to builders, it's going to take a long time to recover. Without #proptechfund and a #proptechfund to help the likes of Homebuyer's Hero , it surely will.
Informational Asymmetry
Informational asymmetries abound. We have really poor and even counterproductive PPR data, which to ignore, since it exists, would probably be a hanging offence if someone says "lend" and a development goes under. Who's going to take that risk for their career without getting some of the upside? Why bother?
(And I would argue that actually, yes, some external funds can see this BS for what it is and are starting to offer money at gouging rates because despite all this, our SME builders desperately want to get going. Capital will flow to fill the void and if it is taking risk it will demand a return. We obviously just need to shape the hole.)
We have an absence of good data on the demand side. Where *would* buyers go to buy a new home at today's prices? How much *would* people pay for a three bed apartment in the cities if it were on offer?
Naaa. Let's not ask. Let's accept site value as sacrosanct and then calculate viability on top of that... Yawn. We should be working backwards. "But that would collapse the market!!" No, it would give complete transparency and kill land speculation, making "now" always the best time to sell a site at the proven capacity for the given development.
Similarly, market data would allow SMEs at 20 houses a year to spin back up near instantaneously, much of it on bank finance too, after a couple of rounds with HBFI of course - canary / mudguard, remember?
领英推荐
We need a 'demand-led' market
These issues are felt internationally too of course, it's just that our major crash, in a tiny market, as well as a complete lack of buyer demand data, are all conspiring against us.
We need a connection to the market such that we transition from a speculatively led housing market, with all of its dysfunction, to one which is demand led. Here's a recent write-up we've had by Cate Lawrence in Tech.eu
Enterprise Ireland is a MAJOR blocker to housing
Of course, Enterprise Ireland can't help here - their tinkering around with the ineffectual #BuiltToInnovate support and Leo Clancy telling the PAC #housing is a headwind, despite their having seen solutions like ours, is the same thing as lenders being slow to lend to SME builders. Jenny Melia was at the Scale Ireland event and heard the Taoiseach's remarks. She had also previously seen the Homebuyer's Hero solution and had concurred with her #HPSU colleague that we should get 5/6 developments built, with 2 repeats, before Enterprise Ireland would be able to help. So - they will help when we don't need them.
Great. ?? Excellent value for tax-payer money, right there.
They can't operate without a canary / mudguard either, it seems, just like the bank lenders. They have the same fear of career risk. We need a #proptechfund / #homesmarkettechfund in order to correct for structural defects in our systems of bringing #housing into being as well as acknowledging that the major success-story that is Enterprise Ireland may not be all its cracked up to be.
Talking to politicians
Housing and the #housingcrisis has become a political football of sorts. Everyone wants more housing, they say, and while there is no #innovation allowed to have access, due to the Enterprise Ireland's ridiculous blocking stance (we are not the only #proptech left outside), the political row remains one of #ideology. "The market doesn't work, therefore, the state should do it."
What, create ANOTHER Enterprise Ireland type of entity, for building homes?
And when the possibility is given to senior opposition TD's to support something with the promise of pushing up housing numbers, they are slow to respond definitively! Would helping a housing solution be disadvantageous politically ahead of an election? Maybe I'm cynical, but some have openly mentioned ideology and the way we get the numbers up as being more important than actaully getting the numbers up now.
I will of course continue to engage with all politicians, but credit where it is due, two politicians are out in front in terms of engagement with me regarding the #proptechfund we so badly need.
(Remember, I have proposed a fund of €20m for proptech businesses like Homebuyer's Hero with new housing solutions, the same size as the recent Cabinet-approved fund for the finite result of 400 refugee bedspaces. I hope it is clear that the proptech fund is a significant multiplying force, rather than something giving a fixed return. It should issue cheques to businesses of circa €1m and get equity in return. Twenty chances at innovative and impactful solutions. It should be a Department of Housing, Local Government and Heritage initiative with Darragh O'Brien TD and successors as shareholder in the proptechs. One success will even pay for the fund. What's not to like here?)
Senator Mary Fitzpatrick , Fianna Fáil
Alan Dillon TD , Fine Gael
I won't get into non-responsive politicians or the opposition parties / TD's for now - Sinn Féin , Social Democrats or Ivana Bacik - to give them a chance to think further, but my sincere thanks to the two politicians above. It is abundantly clear to me that both are trying very hard to bring about solutions in #housing. Let's get this done so we can get tens of thousands on the path to homeownership!