Property finance – what developers need to know
Finding finance21st Jun 2022
Developers large and small need finance to start their development project – whether they be residential or commercial.
But in an increasingly difficult market, which now has a looming cost of living crisis and an increase in interest rates what can developers both locally and abroad expect? Will it become easier or more difficult to secure finance to fund the build of developments? And what are financiers looking for from developers before a deal is secured?
Estate Living talks to Ross Gandy, managing director UK at fintech business EstateGuru; Gary Palmer, CEO of Paragon Lending Solutions; and Gareth Davies, head of development finance at commercial lender Hodge Bank to find out what developers should be doing to secure finance timeously and what they can expect in the future.
How would you describe the current market?
Gareth Davies (GD): I would describe it as buoyant. It depends on what you’re comparing it to. If I go back to before the global financial crisis the only lenders at that point in time was the large high street clearing banks and that was the only opportunity for developers at any scale. The global financial crisis presented a great opportunity for challenger banks, second tier funders and peer to peer and we’ve seen that grow enormously over the last decade or so and now there are hundreds of different funders whether UK based or further afield to the UK.
Is it easier to get funding?
RG: They [big banks] take a long time to make decisions it’s a heavy process and they don’t like risk. But they do a good job of supporting clients who don’t have risk with good interest rates and services.
Alternative lenders like EstateGuru find alternative options for clients who have a bit of an adverse record. We’re more of a story lender than algorithm lender.
We’ll speak to any clients who have a certain amount of experience and got a real estate background that have a solid business plan. We need to know how long the term is and when they expect to exit and we’ll look at cash flows, pictures of the site and land before we would lend, and we’d do a credit check.
Gary Palmer (GP): The banks really rely on a client’s balance sheet to support the transaction but some of the non-bank lenders rely less on the balance sheet and more on the development itself, to consider funding. There are some products available to assist such as bridging finance; presale facilitation if you are short of the required equity, and we know of people becoming partners in a deal to provide equity, so there are quite a few facilities to help developments along.
It’s quite difficult to get funding for retirement developments, but you get companies with strong balance sheets and a good track record, who are still managing to get funding, but usually with the support of a ‘big brother’ investor.
We’ve also observed a trend towards mixed use developments being popular to fund; for example, a development made up of retail, residential units for sale and a hotel component. In the residential space, it’s got to be a bit of a destination, offering more for residents than just a block of flats to buy into, which would’ve sufficed a few years ago.
How can developers make sure their lender is the right fit?
GD: Given the options that are out there, developers need to make sure they are getting the best price they can achieve for the right leverage and making sure they have a good ongoing relationship with the funder who will be around for not only this development but future ones.
What types of developers would put you off giving them a finance deal?
GD: We need to make sure we are lending to an experienced developer. There is funding for new developers but that’s not something that we offer.
However, we lend to people rather than businesses and make sure we are happy with their experience and confident in the developer delivering on what they say they can. Obviously, the more experience that someone has the wider the funding opportunities for them.
There are no specific criteria when it comes to experience, but we try to get some sort of evidence that they’ve done something like what they’re doing today. That would give us the comfort and that could very much lead into the next deal.
How will interest rates impact on lending?
GP: The trend towards compact, more affordable living means there is an opportunity for developers here, even though interest rates will need to be factored in as they are likely to continue to rise. It is also expensive to build and there are supply-chain concerns going forward, given the Invasion on Ukraine. For perspective, in South Africa prime was at 7.25% in May 2020 and now we’re on 8.25%.
Can South African developers turn to lenders from abroad for support?
GP: I know of offshore Development Finance Institutions (DFIs) that have funded local developments, but it’s usually an aspect of a development. For example, one might lend for the infrastructure needed on a development only. They don’t typically dabble in top structure funding.
What changes can we expect to see in the financing market long term?
RG: Since Covid several lenders have come out of the market, but it’s still heavily saturated. The alternative lending market will evolve. Long term, the industry will become more regulated. Alternative lending is a very small part of the market but as any sector grows, they [regulators] look to keep an eye on it.