BLOGS

The squeeze is real — and it is structural

The UK's small and medium-sized housebuilding sector has long punched above its weight. In the 1980s, SME developers accounted for roughly 40% of new homes built each year. By the mid-2020s, that share had shrunk to somewhere closer to 10–12%, and the pressures of the current financing environment risk squeezing it further still.

The latest cycle of pain is not simply a hangover from elevated interest rates. It is a confluence of factors — the end of Help to Buy, persistently cautious mortgage lending, sluggish consumer confidence, and a development finance market that has become dramatically more expensive for those without the balance sheet to self-fund. For the small builder trying to deliver 15 or 30 units on a brownfield site in the Midlands or South Wales, the arithmetic simply does not work the way it used to.

Finance costs: where the numbers stop stacking up

When the Bank of England base rate was sitting at 0.1% in 2021, a small developer could access development finance at an all-in annual cost of around 5–7%, including arrangement fees, monitoring, and exit charges. Today, with base rate having peaked at 5.25% and settling in the 4–5% range through 2025 and into 2026, the equivalent all-in cost for an SME borrower on a standard development loan sits closer to 10–14% per annum — and higher still for borrowers with limited track records or on sites with planning complexity.

That difference is not marginal. On a £3 million development loan drawn over an 18-month build programme, the shift from a 6% to a 12% all-in cost adds roughly £270,000 in finance charges alone — before a single brick is laid or a sales and marketing budget is committed. For a scheme with a gross development value (GDV) of £5–6 million, that kind of cost creep can eliminate the developer's margin entirely.

REalyse planning and development data shows that the number of smaller residential schemes — those with 10 to 49 units — entering the pipeline across England and Wales has declined meaningfully since 2022, with a growing proportion of consented sites sitting undeveloped or being marketed for sale rather than built out by the original applicant. This is a telling signal: developers are securing planning consent (often at significant cost) and then deciding the scheme is not viable to build in the current environment.

Bridging lenders and specialist development finance providers have stepped in to fill some of the gap left by traditional banks, but their rates tend to be even higher, and their loan-to-cost ratios have tightened alongside a general increase in lender caution. For many small developers, the cost of capital has effectively become the ceiling that prevents delivery.

Off-plan sales: the safety net has a hole in it

Development finance is typically structured around achieving a certain level of off-plan reservations before or during the build phase. Historically, getting 30–50% of a scheme reserved before completion allowed a developer to demonstrate viability to their lender and de-risk the exit. That model is under strain.

The withdrawal of Help to Buy in England in March 2023 removed the single most important catalyst for new-build flat and apartment sales — particularly outside London. Rightmove and Zoopla data has consistently shown that new-build asking prices command a premium of anywhere from 15% to 25% over comparable second-hand stock in most regional markets. That premium, once softened by Help to Buy's equity loan mechanism, is now fully visible to buyers. And buyers — facing elevated mortgage rates, tighter affordability assessments, and uncertainty about employment and the wider economy — are hesitating.

REalyse listings data from active sales markets across the Midlands, the North of England, and South Wales shows that average days on market for new-build properties priced under £350,000 has extended materially compared with the 2020–2022 period. In some districts, off-plan schemes are now taking two to three times as long to reach the reservation thresholds that lenders require, forcing developers to request loan extensions — at additional cost — or to re-phase delivery by pausing construction mid-scheme.

The picture is somewhat better for new-build houses than for flats. Family homes in commuter belts with good school catchments and transport links continue to move. But a disproportionate share of the SME development pipeline is made up of flatted schemes in urban centres, where the combination of a premium-to-secondhand price gap and the ongoing legacy of cladding-related buyer caution has been most damaging.

The volume builders: a different world

It would be a mistake to read the SME sector's struggles as a proxy for the entire new-build market. The UK's major volume housebuilders — Barratt Redrow, Persimmon, Taylor Wimpey, Bellway, and a handful of others — are operating in an entirely different financial universe.

These companies carry substantial land banks acquired at lower historical costs, fund construction primarily from their own balance sheets, and have the scale to sustain part-exchange schemes, mortgage guarantee partnerships, and incentive packages that smaller developers cannot afford to offer. They also have dedicated sales forces, strong brand recognition, and the ability to throttle output to protect selling prices — a luxury a developer with a 25-unit scheme and a ticking development loan simply does not have.

When Persimmon or Taylor Wimpey reports lower completions in a given year, it is often a deliberate, margin-protecting decision. When a small developer's completions fall, it is typically because they cannot make the deal work at all. The two situations look similar in headline housing delivery figures but represent very different market dynamics.

ONS new build dwelling statistics continue to show overall completions running well below the government's stated ambition of 300,000 new homes per year in England alone — and the gap between ambition and reality is most acute in the sub-50-unit segment where SME builders operate. Planning reform and affordable housing mandates, however well-intentioned, add further complexity and cost that falls disproportionately on smaller operators with fewer resources to navigate the system.

What the data tells us about regional divergence

The pain is not distributed evenly. REalyse development pipeline data points to significant regional variation in where schemes are stalling versus progressing.

Markets with stronger underlying demand fundamentals — parts of outer London, the commuter zones of the South East and East of England, and certain undersupplied northern cities such as Manchester and Leeds — continue to attract development finance at relatively competitive rates, because lenders have greater confidence in exit values and absorption speeds. In these locations, even smaller developers with strong local track records can still get deals funded.

By contrast, in markets where achieved sale prices per square foot are lower, where the pool of mortgage-ready buyers is thinner, and where comparable transaction evidence is sparse, lenders are applying tougher loan-to-cost ratios and charging wider margins. Some schemes in these areas — particularly in parts of the North East, South Wales, and certain Scottish markets outside Edinburgh and Glasgow — have effectively fallen into a viability black hole: land values have not corrected fast enough to offset higher finance and construction costs, meaning schemes cannot be delivered at a price buyers can afford and still make economic sense.

This is exactly the kind of granular, postcode-level intelligence that separates data-driven development decisions from guesswork. Understanding where GDVs are supported by recent comparable transactions, where yields on any unsold units would remain attractive, and where planning pipelines suggest future supply pressure is light — all of this determines whether a scheme proceeds or stalls.

Outlook: a structural problem that requires structural solutions

The cyclical element of the current squeeze will ease as interest rates continue to normalise. If base rate settles towards 3.5–4% over the next 12–18 months, development finance costs will follow — though with a lag, and not back to the anomalous lows of the 2010s. Some pipeline schemes currently on hold will return to viability.

But the structural challenge facing SME housebuilders is not going to be solved by cheaper money alone. Planning delays continue to add months — and sometimes years — to scheme timelines, compounding finance costs and carrying risks. Construction labour and materials costs remain elevated relative to pre-pandemic levels. And the removal of Help to Buy has permanently changed the off-plan sales environment for new-build homes, particularly flats, in a way that will require either product innovation or new subsidy mechanisms to address.

Government schemes such as the Homes England guarantee programme and the Recovery Loan Scheme have helped at the margins, but the take-up among smaller regional developers has been limited, partly due to the complexity of accessing them. There is a compelling case for targeted public intervention — whether through lower-cost revolving credit facilities, more flexible affordable housing contributions on marginal sites, or accelerated planning timelines for small sites — to prevent the further erosion of a sector that the UK housing market cannot afford to lose.

Until those conditions change, small developers will continue to do the maths — and in too many cases, the maths will not add up.