HGP’s Vic Hepburn on fixing the housing crisis with SME funding partnerships

It is hard to think of a more capricious part of the real estate sector than the SME housebuilder market. “A development might go better than expected. It might go worse. It definitely won’t go to plan,” says Vic Hepburn. As chief executive of the Housing Growth Partnership, the equity investor launched by Lloyds Banking Group and Homes England in 2015 to help unlock housing delivery by SME builders, he should know. Against the backdrop of restrictive financing, HGP has so far worked with 86 partners, most of them SMEs, on 156 transactions, deploying £400m in capital. Earlier this year it passed its 2025 target to fund 10,000 homes and has now reached 11,000. Getting in the room HGP began as a “moment in time intervention” with an exclusive focus on SMEs and on single sites, delivering private for sale homes. “I think there were probably a few detractors at the time who felt that this was a risky thing to do, and we might just lose all the money,” Hepburn says, not least because this is a market that gets burned “pretty badly” when the cycle hits the bottom. LBG committed £50m of equity and government, liking the sound of the scheme, offered to match this via Homes England. In its simplest form, the partnership contributes up to 80% of the equity needed on a single project and agrees a profit share. There are no fees and there is no interest – HGP either does well or badly, alongside the housebuilder. “That’s an important part of our DNA,” says Hepburn. Within three years, the capital was deployed into a market starved of affordable finance (instead of over the four years envisaged) and committed to sites set to deliver 3,000 homes. As a new business with no track record, Hepburn says having “Homes England and Lloyds on the ticket got us into the room”. From there, the HGP project quickly grew into something bigger and longer-term. Scaling up HGP’s Regional Growth Initiative set out to give dedicated equity support to its most ambitious and capable partners in each region, allowing them to invest in their businesses and target larger and more strategic sites. The business plan grew out of a lunch with Glasgow-based Briar Homes, which became one of HGP’s first regional partnerships along with Genesis Homes, Durkan Homes, Stonewood Partnerships and Cruden Homes. It now has 12 such initiatives, taking housebuilders that were delivering 20—30 homes a year up to 100-plus homes. “That takes them into a slightly easier place because supply is easier, funding is easier, everything becomes slightly easier than the hand-to-mouth existence that you have at the very bottom of the SME market,” Hepburn says. The model continued to evolve, with HGP eyeing what bigger impact it could have. Lloyds and Homes England agreed to scale up. They would commit up to £30m on a single site basis, which in turn would get HGP into any deal size across the entire living sector. “All of these areas needed support and indeed some of the operators that were in that space were probably not SMEs, they were mid-market – below the top five national builders and above the SMEs. A lot of housing gets produced by not a huge number of builders in that space,” Hepburn says. It is not quite the same SME growth story, but it meant HGP could play a part in producing much needed infrastructure. At the same time, it held fast to its commitment to the SME market and continues to have part of its funding exclusively focussed there. “We were keen to do regeneration. We were keen to do build-to-rent, student accommodation, retirement living. Pretty much anything that creates a shelter for people and allows us to have more impact,” he says. In September 2021, HGP announced this ramping up of its activities as a new £300m commitment to regional and SME housebuilders in the UK. Lloyds committed to provide £180m of the equity and Homes England £120m. Hepburn said he expected to just “chip away” in that market. But the infamous mini-budget and the near funding vacuum that followed led to deployment happening much faster than expected. More than 10 equity joint ventures are already in place. Profitable enough As the forward-funding market disappeared for all but a few, HGP rapidly found itself in the position of being a significant enabler, rather than simply another option on the table for developers to choose from. It is a model which obviously requires it to put more equity in than it would in a forward funding scenario – but Hepburn says HGP has “shifted its parameters”. If 70% of the costs come from a high street bank, then 30% needs to be equity in some form. HGP says is comfortable with its partners contributing 20% of that 30% slug as “appropriate skin in the game”, leaving it to put in the remainder. This flexibility means operators can still spread capital across multiple deals. Those deals include an equity jv with Olympian Homes to deliver a 790-bed purpose-built student accommodation scheme in Nottingham city centre. The scheme, which will also include 19 affordable homes, has a gross development value of around £120m. In Manchester, HGP has committed £13m to a jv with McGoff Group to deliver a 237-unit BTR scheme. HGP also saw the opportunity to create something similar to its regional growth initiative model but in the mid-market space. In 2022, it announced a 50:50, £80m equity joint venture with Kier Property to focus on residential developments on urban brownfield sites – initially in the south east. A year later, it announced a joint venture with PfP Capital (now Thriving Investments) to deliver 1,200 sustainable homes across regional city communities. HGP has again put £40m of equity into the jv, which aims to develop a secured pipeline of regeneration sites across cities including Glasgow, Newcastle and Nottingham over the next three to five years. B Corp developer Igloo Regeneration, which was bought by Thriving Investments last year, is responsible for delivering the schemes. For all its good intentions, is HGP a commercial success? It is a “profitable enough” business, says Hepburn. Returns on the more standard schemes it backs tend to be marginally above what it would get if it took a mezzanine debt position. “We accept that, and I think that’s almost like the socio-economic discount that applies to trying to do what we do, because it isn’t efficient,” says Hepburn. “That’s not a criticism. But you know, we could certainly take our money and make a better return somewhere else, but we choose to do this.” HGP in numbers 86 partners 156 transactions £400m of capital deployed 11,000 committed homes 4,000 homes built and sold across all tenures Images © HGP