An Update on the Lending Market for Property Developers
By Mark Craven – 1st May 2020
Director – Property Development Lending – Specialist Property Finance
As at today, 1st May 2020, I am able to provide an overview of the lending market and solutions available specifically for Property Developers in light of the current coronavirus situation.
The covid-19 virus has severely impacted the property lending market for various reasons causing a flurry of financial product amendments and in some cases a complete withdrawal. Whilst we navigate through these choppy waters its important to keep focused on the project itself and if the deal stacks up, in that it can be funded and the lender repaid, there will be lenders with an appetite to support. However in development finance there are difficulties caused by virus conditions because:
- Loan officers not able to meet clients face to face
- Challenges with getting a valuation done
- Uncertainty when the construction can commence, but chinks of light appearing
- Uncertainty on the timescale of the project bearing in mind the current restrictions to working practice, supply chain and how long the conditions will last
My advice to any property developer looking to start a project this year is to formulate your plan and provide a draft proposal to the lender so that when more certainty exists and developments can start again you are not in a queue and can move much more quickly having had your proposal pre qualified.
With regards to current property projects these can be funded depending on the stage they are at:
- Midway through development.
In this case your options are to raise finance based on the current value of the scheme as part complete. You should approach your existing development funder to ask for assistance with additional costs you may incur by the fact the site is closed.
Your lender will want to see a plan to get the project complete as this in itself is their exit plan from the project and they should have a sympathetic and understanding ear as its in their interests as well as yours to see the project completed and sold as soon as possible.
- Practical (or near) completion.
At this stage the properties are essentially finished and on the market for sale. However currently, due to the government’s lockdown ruling, buyers are harder to come by. Not only just visiting potential homes or investment properties, these buyers are potentially thinking prices may drop too?
This puts additional pressure on your finances/cashflow and as the old adage says, ‘cash is king’, which is not wrong as you need funds to finish off the project, buy another site, even just sitting out this current storm.
A popular solution right now of funding is called ‘developer exit loans’ which enables the developer to take a percentage of the sales value now and repay the loan when the properties are sold. No need to wait for a buyer to come along and hope they’re not in a long chain, it’s a few forms to complete today.
Whilst lending to new developments is currently challenging, lending to existing projects is available and I expect it will be very useful for developers looking for a solution to take them beyond the life cycle of coronavirus. Indeed with many conveyancing transactions being cancelled and chains breaking there will be lots of new home house sales that have fallen through as a result and the developer has options to help them through this difficult time without having to resort to offering discounts in order to realise the equity. It could be the case that the cost of finance is less than the discount so calculate if its better to hold the stock and borrow against it as opposed to selling at a discount.
Mark Craven is a founding Director of Newsource Commercial Finance which fully owns Specialist Property Finance. The brokerage is one of a small number of UK elite master brokers that packages lending applications for direct clients and other finance brokers. Mark has worked in financial services for over 30 years and successfully navigated through the 2008/2009 financial crash which resulted in the birth of ‘challenger banks’ that created and offered more agile financial products and services compared to the legacy retail banks.