development finance

T

he banks may not be flinging their doors open to housebuilders yet, but lending conditions have continued to improve for companies seeking finance, according to those in the know. Market conditions seem stable after the surge of 2013/14. And over time, there has been a groundswell of specialist lenders who will lend on terms that have become foreign to the high street.

loan-to-value levels While banks have recently nudged their loan-to-value levels up from 50% to around 53% GDV (gross development value), “some specialist lenders can advance loans at 90% loan-to-cost,” says Nish Malde, finance director of Inland Homes. “But that comes at a higher risk. The clearing banks won’t offer high leverage loans.” Banks are actually supportive of increasing their lending on a site by site basis, according to Stephen Brazier, md of small housebuilder Aquinna Homes. When it comes to medium term revolving credit facilities, there remains a “disappointing reluctance” to engage with smaller housebuilders. “This leaves plenty of space for more flexible, but more expensive stretched senior and mezzanine lenders.” But SMEs seem to be benefitting from the changed landscape. And, of course, specialist lenders are not complaining – businesses are flourishing. Business

Lending Group, a specialist lender with senior and mezzanine loans on offer, has had banks give it leads. “This has been happening over the past 12–18 months,” says BLG’s chairman Peter Wade. “Developers are optimistic and coming forward with sites that have been around for a while.” Recent research from United Trust Bank reveals that almost nine out of ten development finance brokers have been approached by developers in the past 12 months after their usual lender rejected their requests for funding. It remains the case that banks will be

drawn to deals from larger, handsomely capitalised housebuilders, observes UTB’s executive director Noel Meredith. An “almost no-go” area for any housebuilder seeking finance is for land without planning permission, says Nish Malde. “If a lender provides funding without planning consent, it will be expensive and they will want a share of the profit. The deal has to be very good to take on board.” Unsurprisingly, a lender’s focus is on repayment so they are somewhat nervous.

In the first part of our finance and legal special, Suzie Mayes reports on the development finance market and lending conditions for housebuilders. High street banks remain reticent – and there are wider market challenges – but specialist lenders are ready to help

Financial foundations

Dunedin Homes, with development funding from Wolsey, is at the early stages of construction of 55 houses and apartments in Willenhall, West Midlands

development finance

Pluto Finance has given funding to Galliard Homes for an office-to-resi conversion in Lewisham

3continued Medium sized housebuilder Cameron Homes has a 20year relationship with banking giant HSBC. But being a loyal customer has not insulated the Staffordshire based company from the downturn’s restricting effects. “There’s now a lot more cost involved and a lot more due diligence,” says md Ian Burns. “It can add a burden complying with the bank’s criteria and it adds expense to the business. The bank has reduced its risk by changing its lending ratios.”

Development in motion Pluto Finance has provided a £20.4 million facility to Galliard Homes for its redevelopment of an office block in Lewisham, south east London. The loan consists of stretched senior residential development finance, combining senior and mezzanine debt. Chris Philp, Pluto Finance’s ceo, said: “Our

and given SMEs more choice,” says Ingenious’ investment manager Dean Brown. “We charge slightly more than clearing banks due to our increased levels of gearing but we offer flexibility and are more responsive, so offer a better solution for our borrowers.” It appears there are more providers of property finance in the marketplace, observes Barrie Palmer, financial executive of Moody Venture Capital, “although it is sometimes difficult to quantify the precise terms on offer. We however, feel our terms are generally very competitive in the current climate, and can be flexible to meet the developer’s requirements.” If a lender does charge more, housebuilders can avoid the pitfalls of cheap, claims James Bloom, chief executive of Regentsmead, whose clients build up to 20 units a year. “One of our maxims is ‘cheap is often

“Beware of lenders that charge upfront fees before agreeing to lend” James Bloom, ceo, Regentsmead Ingenious Real Estate on the other hand, is one specialist lender offering up to 90% loan-to-cost lending, and a maximum of 75% LTV on projects. Current LTVs in the specialist lending market generally range from 55% to 65% GDV, with levels of development costs at 65% to 70%. “The wider range of lenders in the market has increased competition 28

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stretched senior business continues to prove popular with residential developers who have lost trust in the traditional banking model.” Galliard’s office conversion will yield 137 apartments and is in one of London’s “major regeneration areas”. The scheme has a gross development value of “in excess” of £35 million.

more expensive in the long run,’” he cautions. Bloom also tells housebuilders to “beware of lenders that charge upfront fees before agreeing to lend, and try to pick a lender based on reputation and a track record of delivering rather than a more appealing headline rate.”

solid background Those housebuilders with a solid background will attract finance more easily. But Development Finance Ltd (DfL) is willing to take on companies that are lesser known. “Many of our clients are deemed too inexperienced or their projects are too small to be able obtain bank funding,” says David Levitus, director of Development Finance Ltd. “We’ll generally fund up to four houses or eight flats on a particular site although we will consider larger projects in two or three phases.” He concedes that several of the company’s clients could obtain bank funding at lower interest rates than DFL can offer. However: “We find that on continued4

development finance

Crowdfunding The relatively new concept of crowdfunding involves a large number of individuals donating a small amount of money each to fund a project or venture. Asimla – which stands for A Stake In My Local Area – is a fledgling company, due to launch its offering to enable people to help finance residential projects through its website. “We’ve got an audience of consumers looking at alternative ways of making the most of their money, and they may feel that property is a good investment what with the country’s obsession with home ownership,” says Asimla’s director Charles Pearce. “On the other side, developers are looking for development finance.” Housebuilders seeking finance from Asimla must have five years’ experience under their belt, and be in the process of developing more than five units. “The housebuilder will be able to launch their development on the site, with information on the design of it, where it is, how much money they’re looking to raise and the interest rate they’re paying,” Pearce explains. “The crowd investor can simply decide if they like the project.” Investors can contribute a minimum of £250 and once the scheme gains approval, the funds are released to the housebuilder. “The project then gets sold and investors get their money back.” 30

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Development Finance Ltd provided finance to builder Corryard for its Benheath apartments in Perthshire 3continued average, a client could complete a property development with us and start on their next project in the same time that it would take them to be only two thirds of the way through a bank funded development.”

we’re market leaders in terms of speed of drawing down development funds. This is typically done within 48 hours of the bank’s quantity surveyor being on site.” But what has become slower is the process of securing a mortgage. This is thanks to the decisions made under the Mortgage Market Review (MMR) in April 2014, meaning that an already stringent market has toughened further. “The MMR has made things difficult. The new rules and the slower market in the second half of 2014 could be absolutely aligned,” says Stephen O’Brien, md of Wolsey Securities, which offers a range of funding options. “The objective of the MMR was to make people borrow more sensibly. But the difficulty is that the mechanisms for accessing the levels on which banks are prepared to lend appear to be opaque to customers.” In the wake of the MMR, Regentsmead’s clients have reported a “sharp increase” in the time it takes their buyers to obtain mortgages, and this impacts on their profitability. Money is borrowed for longer, notes BLG’s Peter Wade. However, the restrictions have “calmed the market,” says Cameron Homes’ Ian Burns. “We have a number of continued 4

Lenders are generally confident about the strength of the recovery. This is unlikely to be compromised by the looming general election and its after-effects Aldermore has numerously been referred to as a “challenger bank” – a new bank with an apparently different attitude to the mainstream lenders. It seems it can make fairly rapid decisions. “In most circumstances, we’ll provide you with an in-principle decision on your loan within 24 hours,” says Simon Knowles, Aldermore’s head of property development. “Post legal completion

development finance

3continued customers who can’t borrow what they thought they could even though they have a good credit rating. In the long term, the MMR will stabilise prices. The strong demand still remains.”

Help to Buy Meanwhile, Chris Hector, director of Davon, a lender of structured property finance, claims that the Help to Buy initiative has opened up the mortgage market. “The government initiative has helped reassure buyers and unlocked sales for some of the big housebuilders. On another level, the willingness of the government to consider 95% mortgages appears to have acted as encouragement for high street bank and building societies to do the same. Which in turn has resulted in an overall increase in the number of high LTV mortgages in the marketplace.” However, Ingenious’ Dean Brown says: “With Help to Buy, it depends on which side you look at. It’s helped people onto the housing ladder and had a small effect on the market, but it could be argued that it’s driven up prices at the lower end of the market.”

Regentsmead is helping to fund a scheme of four detached houses in Quarndon, Derbyshire

Another government initiative – The Builders Finance Fund (BFF) – was launched last year to finance small schemes that have stalled or slowed. It is intended to benefit SMEs, but the general industry consensus is that is not suitable for the small guys and

is yet to make its mark. BFF is for developments of five to 250 units, but: “Only a small percentage of smaller builders would qualify for such a scheme,” says John Waddicker, director of financial broker Positive commercial Finance. “With that type of initiative, continued on page 344

development finance

3continued underwriting remains and it’s too rigid.” The initiative is to be welcomed, but the time it takes to access the BFF is a concern, says Wolsey’s Stephen O’Brien. “The BFF also only works where developers have sites. SMEs are capital constrained and can’t afford to hold onto land for any length of time.” And most of the names on the latest shortlist would not fit most people’s definitions of an SME housebuilder – few of the schemes are of less than 20 units, comments UTB’s Noel Meredith. “If the current shortlist of bidders is anything to go by, very little of the £525 million BFF

may end up with the housebuilders who really need it.” But what lenders are generally confident about is the strength of the recovery. This is unlikely to be compromised by the looming general election and its after-effects. Michael Dunne, owner of broker Linkmaster Finance, is particularly upbeat: “Some forecasters suggest that a hung parliament after the general election may throw a spanner in the works – but that’s a red herring,” he insists. “The sheer weight of capital available to chase opportunities will shrug off any concerns. Investors will address the nation’s housing shortfall by using their cash reserves to begin another cycle of expansion.”

“Some of the larger banks are beginning to realise that providing medium term funding of three to five years to well-managed housebuilders is a relatively low risk and lucrative proposition” Stephen Brazier, Aquinna Homes

The future looks bright for experienced housebuilders seeking finance. It is a stark contrast to the dark days of several years ago – Barrie Palmer of Moody Venture Capital comments that unfortunately, MVC had to take over a number of sites during the downturn. “However, our current portfolio is expanding steadily with good quality developers and housebuilders. “We have recently broadened our geographical area to encompass a larger part of the UK, and will consider any project on its financial merits.”

easier life And Aquinna Homes’ Stephen Brazier is cheered by the changing attitude of high street banks. This should make the day-to-day life of a smaller housebuilder that bit easier. “At least some of the larger banks are beginning to realise that providing medium term funding of three to five years to well-managed growing housebuilders is a relatively low risk and lucrative proposition. “The small housebuilder will benefit by being able to plan their businesses with more certainty and commit to larger sites than enduring a ‘hand-to-mouth’ existence.” hb

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