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Market update: Securing development funding during COVID-19

We asked the team of respected finance brokers we work with to give us the inside track on the state of the market when it comes to financing developments. They paint a much more positive picture than many might have expected…

As an agency that specialises in working with housebuilders and developers throughout the UK, we are well aware of the challenges that many have faced in recent months. Today, one of the biggest perceived challenges is the provision of capital funding for new and existing projects. Are lenders still offering development financing and for which kind of projects? And if so, has the cost risen significantly since January?

Are lenders still lending to developers?

In short, yes. Those lenders who have dedicated themselves (or have specialist teams) to focus on property development are in most cases open for business. But their appetite for risk and the types of projects they will choose may differ depending on the sources of funding they have available.

For those lenders who hold capital on their own balance sheet for lending purposes, there is still a strong desire to create a Return On Investment. While these institutions may steer clear of projects that fall on the edge of their lending criteria opting instead for less risky ventures, they will still be keen to support good quality developers in securing the finance they need. And indeed, it appears the costs of financing from these lenders is pretty much unaltered from pre-COVID-19 levels.

Those lenders, however, for whom capital comes from dedicated funding lines or investors, are in a slightly different position. They will have pressure exerted on them from an external party meaning they’ll take a more cautious approach to their lending.

As a result, we’ve seen these lenders reduce their maximum gearing levels for new transactions by around 5%-10% of GDV (albeit the transactions are priced on high LTV levels in most cases). It’s worth noting that those lenders who rely on raising capital from investors on a deal by deal basis or collectively via peer to peer platforms and investor clubs are finding it much harder to raise new, fresh capital for transactions.

Bottom line: these lenders have an appetite to continue lending but we’re likely to see them exercise more caution in their decisions.

 Key findings

We took a number of ‘good news’ messages away from our conversations:

  • Acquisition finance is available for the acquisition of sites

Lenders may be looking for less risky projects, but there is a significant appetite for funding greenfield and brownfield sites where planning is to be sought, or where developers are to enhance the planning post-acquisition. They’ll want to see that you as a developer have the experience for the job, but if that’s the case, you’ll fit nicely into the target market for many lenders.

  • Funding costs have not increased so far during the pandemic

Currently, there seems to be no increase in the cost of borrowing across the entire residential development finance market. There is a slight element of caution in some areas reducing the maximum gearing that funders are considering, but a large number of lenders continue to look for new projects.

  • Social distancing is not adversely affecting the release of funds

The restrictions put in place and difficulties of social distancing on-site, have made valuations and monitoring surveys more difficult, impacting on the underwriting and due diligence procedures of lenders.

Gradually, however, new ways of working are meaning that specific requirements can be met to enable funds to be released on time. We’ve even heard of several projects where the monthly ‘inspection’ has been done via a video walkthrough of the site.

  • A partly completed development can be refinanced or additional capital sought

We’ve spoken to developers who have been concerned about what would happen if financing fell through mid-project. And we’re assured there’s no need to worry. New lenders have been found recently for a number of projects for which the current lender has withdrawn funding partway through.

In each case, the new lender has agreed to take on the project using the same valuers and monitoring surveyors and effecting a ‘transfer’ of the senior debt facility and security without any adverse impact on the construction project as a whole.

  • Additional capital can be sourced during a project

It may be that the current funder of a scheme wishes to remain as the lender to the project but due to cost escalation or other factors is unable to provide the additional capital needed. Our finance partners have lenders who will step in on a second charge basis to provide an additional tranche of capital to cover the extra costs.

  • There is funding out there for development projects

The overriding message from our finance broker partners is that there is funding out in the marketplace to finance new residential development projects. They have over 100 lenders who are willing to take on transactions right now.

The key to finding opportunities as a house builder or developer is having the specific experience required and ensuring the end product is attractive to the ‘mass market’ rather than a highly specialist or niche property.

  • But what about when the project is finished?

 Despite the fact that estate agents are now open for business once more, we’re seeing a huge lag in sales of properties as prospective purchasers have been unable to undertake viewings. This creates problems where developers are reaching the limit of their existing loan facilities or the expiry of loan agreements and cannot shift the finished products.

Our finance brokers have lenders who are happy to take on completed properties, repaying the original loans and providing time for properties to be sold. Where developers are reliant on equity tied up in the project to allow them to purchase a new site, many lenders will also release equity and finance the new project as well.

Special note: lenders face their own logistical challenges

It’s worth noting that, as remote working takes hold, financial institutions who provide facilities to commercial customers, including property developers, have found themselves focussed largely on business support. They are helping to resolve cashflow issues and dealing with other matters that are vital to the health of the wider economy. This has meant administrative functions are stretched and non-critical activities such as development loan applications have been subject to delays.

The constraints of ‘social distancing’ and ‘working from home’ too are causing further strain on the efficiency of many of these lending organisations. And we’re finding that a number of the larger institutions are choosing to focus solely on supporting existing customers and don’t have the capacity to service new loan proposals from non-customers.

Making your project attractive to lenders

We hope the above provides some insight into the current funding market for residential developers as well as some positivity. There is plenty of funding accessible for a range of projects and needs.

However, more so than ever, to secure the attractive facilities that are available, your funding proposal must be comprehensive and clearly show the experience and expertise of the sponsors, as well as offering complete clarity of the intended project itself. In order to achieve this, we recommend you fully embrace the relevant professionals from within and outside your team to support the project and funding request.

Whether you are looking for immediate development finance or wondering how to finance future projects, we’re very much open for business and are here to help. Talk to us today or complete the form below and a member of our team will be in touch.



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Author: Kevin Ellis

Our company was established in 2014 by Kevin, who previously ran a highly-successful development department for an award-winning property services business. Today, he has grown Thomas Mae into a thriving business, staffed by a trusted team of property consultants who are adept at sharing their knowledge and skills. Kevin’s mission is to foster strategic land investment, to deliver solid, profitable results across the whole of the UK, and to work effectively with both private landowners as well as commercial and institutional landowners.

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