When Sarah Milne became chief executive of mezzanine lender Property Box Finance last September, she entered a development market facing significant pressure – but also one where the right type of capital could make a meaningful difference.

Sarah Milne, chief executive of Property Box Finance

Milne, whose career in real estate finance has included helping to structure and bring forward more than £1bn of development, believes access to flexible funding will be crucial if SME housebuilders are to play the role policymakers expect of them in boosting housing supply.

“The government is pushing hard for more housing delivery,” she says. “But it’s easy to focus on the largest housebuilders delivering the biggest number of units. In reality, housing supply comes from a much wider ecosystem of smaller developers.”

That ecosystem has shrunk significantly in the past few decades. For example, only around 10% of new homes are now built by SME housebuilders, compared with 40% 40 years ago. The drop follows successive property cycles, a tightening of planning constraints and a rise in the capital intensity of development. As a result, many policymakers, including housing minister Matthew Pennycook, see the revival of smaller builders as essential if housing supply is to increase meaningfully.

SME developers face a number of challenges in the current market, including balance sheet constraints and limited equity capacity, alongside higher interest rates, rising build costs, labour shortages, planning delays and slower residential sales.

“All of those factors can stall projects and lock up equity in existing sites,” Milne says.

Mezzanine finance allows developers to stretch their equity across multiple projects

The result is that more SME developers are looking creatively at how they structure capital across their businesses. Some are exploring partnerships with finance providers to help them inject additional capital into new schemes while still managing their existing projects. Others have temporarily switched completed units to rental, while waiting for the sales market to recover – a strategy Milne says is rarely ideal.

“If a scheme was designed to be sold, it often isn’t optimal for the rental market,” she explains. “It can lock up capital indefinitely with relatively low returns.”

For mezzanine lenders, this environment is creating opportunities to support developers while helping them manage financial risk.

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Property Box Finance focuses on providing mezzanine capital that sits between senior debt and equity in a project’s funding structure. This approach allows developers to bring in additional capital without giving up ownership or profit share to a joint-venture partner.

“Instead of bringing in an equity partner and giving up part of the profit, mezzanine finance can be structured as a fixed-rate layer of capital that developers can cost into their cashflow,” Milne says. “That allows them to stretch their equity across multiple projects while still retaining most of the upside.”

Structured finance

For SME developers in particular, the ability to deploy their equity across multiple sites can be transformative, according to Milne. Many smaller builders operate with relatively limited capital bases, meaning their growth is often constrained by how quickly they can recycle equity from completed projects.

Additional layers of structured finance can therefore allow them to scale more efficiently, while maintaining control of their businesses.

Mezzanine funding is also becoming a more strategic part of development finance as funding gaps emerge. “Senior lenders tend to have fairly tightly defined terms,” Milne says. “When valuations change or construction costs increase, borrowers are increasingly looking to mezzanine capital to bridge that gap.”

Those gaps sometimes arise late in the development cycle, particularly if build costs rise or end values soften after senior debt has already been agreed. Having access to flexible capital that can be deployed quickly can help schemes proceed without requiring developers to renegotiate entire funding structures.

Despite the opportunities for alternative lenders, Milne is clear that the current environment demands careful risk management. “There are still significant headwinds in the market,” she says. “Robust underwriting is absolutely key.”

At Property Box Finance, this means focusing closely on the delivery partner, the credibility of the team behind a scheme, the quality of the underlying asset and the strength of the exit strategy.

Refinancing risk is also firmly on lenders’ radar. Development schemes that rely on timely sales or refinancing can face challenges when market conditions soften.

“There is still a lot of liquidity in the market, particularly from lenders offering exit bridges at relatively high loan-to-value ratios,” Milne says. “But simply securing an exit facility isn’t necessarily the best outcome, because it introduces additional cost and risk.”

In other words, while the availability of exit finance can provide breathing space, it does not necessarily solve the challenge of slower sales markets. Developers may gain additional time to sell units, but the extended hold period can erode their profitability through higher interest payments and extended exposure to market risk.

Instead, Milne argues, developers should build greater resilience into their business plans, including more realistic timelines and pricing assumptions. “The residential market had a particularly difficult year, so many business plans have been tested,” she says. “It’s about building in more of a buffer.”

Despite those pressures, pockets of strength remain across the housing market. Institutional capital continues to flow into large build-to-rent and co-living developments, while interest in single-family housing is growing as affordability pressures reshape the market for first-time buyers.

“There have been some early positive indicators from property data platforms like Rightmove and Zoopla,” Milne says. “But it will take time before those translate into real transactional data.”

But she believes the underlying fundamentals remain strong for SME developers. “They are incredibly resilient and entrepreneurial,” she says. “For the right product in the right location, demand still exists.”

Unconventional route

Milne’s route into property finance was somewhat unconventional. She formerly competed as a professional athlete, including representing Great Britain in badminton at the Youth Olympic Games.

After moving into real estate in 2014 – initially as a commercial investment manager at Merchant Place Corporate Finance – she specialised in debt, working across the capital stack from equity through to senior and mezzanine lending.

Lately, she has focused on sustainable finance and impact investing, most recently as head of impact at Puma Property Finance. “That work aligned strongly with my personal values,” Milne says. “I’m very people-led in my approach and interested in outcomes, not only for the environment but also for the communities where developments happen.”

That philosophy now shapes her approach at Property Box Finance, where the aim is to build long-term relationships with developers rather than simply provide transactional funding.

“When you’re working with SME developers, you tend to be much more hands-on,” she says. “You’re closer to the detail of the schemes and the people delivering them.”

In Milne’s view, supporting these developers will be essential if the UK is to increase housing supply. “Unlocking sites and improving access to capital will be critical,” she says, adding that policy measures that stimulate demand, such as a successor to the Help to

Buy scheme, could also help the market regain momentum.

“It’s important to remember that the housing market works as a chain,” she adds. “It’s not just about first-time buyers; the whole chain needs to move for the market to function properly.”