Summer 2019 Development Finance Market Review

1. Why do we provide this?

Most developers and associates understand how important real-time finance marketplace info now is in order to make the right funding decisions quickly.  

We provide this review in order to help developers know exactly what’s going on at all times, how best to tackle this ever expanding marketplace, and ultimately provide you with the right data and information so you can use the lending marketplace to your advantage.

But first... a brief, big picture perspective..

With around 60 senior debt lending options, 20 mezzanine options and a small but increasing number of equity and JV options, the choice has never been greater.  

More choice though has opened up a whole host of problems for developers when selecting their lenders, due to the lack of standard industry practice and clarity.

Not only that, but: 

Offerings from lenders change more frequently than many realise.

Unbelievably, and in our experience, approximately 25% of development finance funders change a part of their product every quarter, and often without many people knowing it's happened.  This is why we speak to them regularly, and provide our seasonal lender comparison data. 

So why should you care?  

Staying on top of lenders regularly will save you a fortune in finance costs if you know what's really going on. 

In this regular review, we will breakdown the different lending variables and sectors, and see what changes may be occurring as follows: 

• Liquidity
• Geographical Appetite
• Headline Interest Rates
• Maximum ‘Loan to GDV’ Thresholds
• Maximum ‘Loan to Cost’ Thresholds
• Equity/Cash/Deposits Needed
• Arrangement & Exit Fees
• Changes in Sector Appetite
• New ‘Quick Build’ Technologies
• Prime/Luxury Market
• 100% JV/Equity Finance
• Development Exit Finance

We will then take a look at current trends and provide general market sentiment. 

By reading this, you will be able to go away armed with up-to-date information from industry insiders that will help you make better funding decisions faster, once and for all.  

2. Key Marketplace Summary

• Liquidity remains strong despite the political uncertainty
• Slow Sales are starting to have an affect on lender appetite however on "50/50 deals"
• However, some lenders are now willing to consider planning gain as part of a developer's equity stake
• Geographically, lenders continue to expand their reach
• Some lenders are now working off a 180 day valuation instead of the Open Market Value, demonstrating market caution
• Increased competition at the cheaper end has resulted in lower rates on a case-by-case basis
• Max Loan to GDV options have been pulled with several lenders, further demonstrating market caution
• Equity investment options are increasing but slowly
• Modular Housing: more lenders are actively trying to solve this funding issue by funding supplier contracts on an LTV basis
• Transaction activity is high but operationally very slow; planning in particular remains pedestrian due to funding cuts
• There are encouraging signs of lending growing in the prime markets
• Development Exit Finance is a fast growing market but developers must be wary of waiting too late from an LTV point of view

3. Liquidity

Liquidity in the marketplace remains strong in both the debt and equity markets.

This has been further demonstrated by the continued increase in the number of lenders and funders, backed by more investment into the marketplace. 

There is still the odd highly leveraged product at 75% of GDV, but in the main lenders are reining their leverage in due to slow sales and marketplace uncertainty.

Whilst at present there is little sign of strong liquidity changing, everyone is naturally keeping an eye on Brexit and the global economy in general.

4. Geographical Appetite

The trend for more London/South East centric lenders to look further afield continues to accelerate.

Whilst policy may dictate a strategic change in view, operationally there is usually a time lag as lenders' analysts and credit teams try to get comfortable with new locations.  Lenders considering new territories isn't without its application and approval hurdles at present.

London remains stagnant bar a few locations, and is unlikely to materially change until the future of Brexit in particular is resolved.  Lenders report a slowing of sales as low down as the £500k to £600k mark in South East locations, so comparables are becoming ever more important in gaining approval.

Any work a developer can do to demonstrate their GDV is accurate via comparables of 'recently sold' units will immensely help their case with a lender.

5. Headline Interest Rates

Little movement recently on rates, with a number of lenders having made the move in the last quarter or so.  

To recap, a number of lenders now offer cheaper products for reduced ‘Loan to GDV’ requirements using a tiered approach.  For example, a 10% per annum lender remains at 70% of GDV, but some can now reduce their rate to 5.5% to 6% per annum at the 60% of GDV mark.  The upshot is that there is more competition now for the cheapest lending rates than was the case even 6 months ago.

Please also take away our cautionary note re: interest rates.  That is to say comparing the rate of interest for development finance is not best practice when it comes to choosing the cheapest looking lenders.  

Lenders can use up to 3 different methods to apply rates of interest.  

What happens is development finance lenders with the same apparent interest rate can actually be charging very different amounts of interest! 

Most lenders also do not use the developer’s cashflow as the constant, and can model the cashflow in different ways too.

If 3 different lenders are modelling using differing cashflow schedules, how can you truly compare the interest from them? 

The answer is you can’t.

6. 'Loan to GDV' Thresholds

There continues to be a definite softening with most lenders when it comes to Max. Loan to GDV ratios i.e. how much the lend will fund in relation to the GDV.

This is being driven by Brexit uncertainty and the continuing reports of slow house sales in certain parts of the country.

It is also noticeable that a number of lenders now prefer to work off the 180 day valuation rather than the Open Market Value (OMV).  This is to give them further comfort in a uncertain market.  Sometimes the 180 day and OMV are the same, but often there can be a significant downgrade, where the valuer is essentially asked what price does the site need to be, in order to sell all of the units within 6 months.  Given plenty of sites are taking far longer to sell out, downgrading will become more frequent in the current climate.

What this means for the developer is that if the GDV is downgraded, the lender is giving the borrower less funds, and means more equity/cash will have to go in to cover the gap.

Whilst the above is certainly trending, it is still possible to get lending at 70% or 75% of GDV Gross, depending on the amount you wish to borrow.

7. 'Loan to Cost' Thresholds

There continues to be a softening with the Loan to Cost Ratios as well, where the higher leveraged lenders, for instance, would prefer to see between 80% to 85% of the total project costs lent instead of 90%.  It doesn't mean you cannot get 90% funding, but the deal is now scrutinised more.

With slow sales to blame, it has been noticeable in the last month in particular that lenders are getting hotter on cash in.  However, and slightly contradictory, some lenders are now willing to consider planning gain as part of a developer's equity stake.

Typically, when working out your numbers, remember that the LTC ratio is the total project costs excluding finance and disposal costs.

What has been interesting is a change from some lenders to include disposal and marketing costs in their LTC ratio.  

So a further cautionary note regarding comparing lenders; even evaluating using LTC ratios is potentially misleading.  

Ensure you're aware when you're comparing apples with apples, and when you are not!

8. Cash/Deposits Needed

Some conflicting options currently on Cash stakes required.

Many lenders are getting quite strict with cash going in, and in particular wanting to know where the funds have originated in line with updated changes on Anti-Money Laundering.

On the flip side, however, some lenders are now happy to consider planning gains as part of your equity going in.  This could be very helpful for developers working on Subject to Planning deals

How much cash needed for development funding is very much in line with the LTC ratios, and whether your risk profile and debt appetite affects what you like to put in.

In general, if you’re rate sensitive, cash deposits have risen in line with more conservative GDVs and Loan to GDV ratios over the last 6 months.  The minimum you can still get away with is 10% of the total project costs.  However, equity investment has certainly become fashionable, and needed by many, particularly if previous project stock is failing to shift.  

If the equity requirement is high enough, it is possible to fund up to 90% of that slice, meaning only 1% of the total project costs needs to be found by the developer.

9. Arrangement & Exit fees

Arrangement fees are still constant at the 1% to 2% mark, although beware about how these fees are applied, they can vary wildly against the gross or the net facility amount. Always dig deeper than first appears!

Some Exit fees are changing as the marketplace gets more competitive at various leverage points.  A few of the GDV % Exit fee lenders have changed to doing a % of the loan as the latter is clearly more attractive as a lower cost and a fixed cost at that too.

Exit fees have always ranged more widely than arrangement fees because it is here where some lenders ‘hide’ some of their interest or total return.  It is worth noting as well that several lenders do not include exit fees in their total cost structure, because they are not deemed project costs, only disposal costs.  Thus they can appear cheaper than other lenders who rightly include their exit fees in the total funding cost package.  

Be sure you are comparing like with like; often you aren’t.

As a recap, exit fees can be as low as zero and as high as 3% of GDV. 

The exit fee content is different from lender to lender because some are invested into by debt sources and some are invested into by private equity lines, with the PE lines typically requiring much higher overall returns.  Lenders understand the difference it can make at the outset, and it is why lenders often advertise a much cheaper rate to win business without initially disclosing the exit fee structure.  However, when it comes to the crunch, exit fees reduce in the face of competition, from 2% to 1%, or from a % of GDV to a % of the loan.

10. Change in Marketplace Appetite

There is a continuation of development finance lenders tending to move towards the most vanilla of schemes i.e. those projects that have the best chance of selling out or holding value.

The type of schemes we are talking about involve units priced up to around the £700k to £800k mark, and in some areas one could argue you should aim lower than that mark too at around £500k to £600k as discussed in our Geographical Appetite section. 

Higher risk sectors such as prime luxury, or unique propositions, have far fewer buyers and are therefore less desirable to lend on, particularly with the changes at the top end, although there is some easing of lending restrictions in this sector.  

Finally, the conservative lenders in particular are looking for larger project margins, on top of greater cash deposits. 

Minimum margins considered are usually 20%, but 25%+ is helpful to some.

Modular we will discuss in a separate heading shortly.

11. Build "Offsite" Technologies

The Build "Off Site" era, including Modular Housing, is gaining momentum amongst developers due to its ability to greatly increase profitability. 

This is because the build period is much quicker, so total costs reduce dramatically. 

The good news, having had in-depth discussions with a number of lenders, is that several of them are actively looking to resolve the current funding issue with these projects.  

Some lenders are starting to look at funding on an LTV contract basis, provided the upfront terms from the modular supplier are not too onerous.  50 or 60% LTV is possible on a 'cash in, cash out' basis.

The problem has been, if you're unaware, that these builds need a greater, amount of finance, earlier, due to the quicker build timeframe, and the lending/surveying community has issues with what constitutes enough value. 

Whilst these technologies rightly gain momentum with builders, the surveying community is struggling to provide enhanced GDVs in order to allow a good number of lenders to really be of help.

Unfortunately there have been recent instances where extra site value is not being recognised, meaning a lender cannot fund, and the builder has to fund the cashflow shortfall themselves.  Everyone loses out financially because the technology doesn't take off, builders make less money, lenders don't lend and make as much money, and valuers don't get more business.

The sector is still embryonic and many challenges remain on top of valuations, such as the lack of factor investment and therefore supply in the UK.

As always, we are keeping a close eye on this sector, with the hope and belief that finance and valuing with eventually catch up to allow builders to profit in the ways they would like, without needing the cashflow to survive.  One or two lenders are now talking a much better game..

12. Prime/Luxury Market

This sector remains the same as in recent reviews in that there are severe limits on funding, however there are some more positive noises coming from some lenders now. 

To define the sector, we are talking about developed individual unit sale prices from £1m upwards, or £1,000 per square foot.

Most will be aware now that sales of prime property, particularly in London, have virtually ground to a halt. 

This has been due to well documented government policies to dis-incentivise the target audience e.g. rich foreign buyers and landlords. 

Finance decline rates have been extremely high as a consequence for several years now but some lenders have increasing their maximum funding per unit to £1.5m or £2m.  It's not a total change in appetite, but some lenders, who previously maybe had stock on their books they were struggling to sell, may have shifted those now and are willing to take a view on new applications.

If you are a luxury property developer, ensure you have thoroughly researched your funding options before committing to any projects.  There are a couple of avenues, but of the luxury developer clients we know building properties above the £2m mark, most are using private investment sources or are building to spec, stage funded by the buyer.

13. JV and Equity Finance

This embryonic market is beginning to grow now, with new entrants starting to add to the limited supply of financing options.

100% JV funding is available from up to 6 sources depending on the size of loan, but usually comes with a significant profit share deficit in the lender's favour.

I would always say this: if you can come up with 10-15% of the total project costs (excluding finance and disposal), you will find much more cost effective funding is available to you.

On the equity side, the news is a similar one to the above.

With 2 or 3 options, it is possible to fund up to 90% of the outstanding equity, meaning you only have to come up with 10% of the equity, or as low as 1% of the total project costs.

These tend to be more bespoke products, so do speak with a marketplace specialist to find out what's achievable for your situation.

14. Developer Exit Finance

Due to the current plight of slow sales, several short-term lenders now offer this product in some form.  

Many standard senior debt lenders are now having to extend facilities in the hope that the marketplace in those locations picks up. 

This clearly results in developer’s margins being further eroded and the ongoing worry that the lender may want them to service interest and capital in the near future.

Developers can take that pressure off by changing lenders on a rolled up basis for 12-24 months, should the costs not outweigh any potential benefits.

It is possible to get up 75% LTV, of the Open Market Value (OMV).

Be careful though as most lenders in this niche value at the 180 day mark, and will likely mean you receive less funding due to a downgrade in value.

Also note:

Don't leave it too late to get this type of finance if you think the sales will be slow.  

Many developers wait and wait, all the while eroding the equity position and hurting their chances of remaining within a lender's maximum LTV criteria.

With the uncertainty over Brexit continuing, it is likely that sales in general will remain slow for the foreseeable future and that this product will remain in demand for a good while yet.

15. Summary and Sentiment

As we approach the middle of 2019, the marketplace is fairly mixed in terms of positive and negative trends:

• Liquidity remains strong despite the political uncertainty
• Slow Sales are starting to have an affect on lender appetite however on "50/50 deals"
• Some lenders are now willing to consider planning gain as part of a developer's equity stake, but others are very hot on cash equity going in
• Geographically, lenders continue to expand their reach
• Increased competition at the cheaper end has resulted in lower rates on a case-by-case basis
• Max Loan to GDV options have been pulled with several lenders, further demonstrating market caution
• Equity investment options are increasing but slowly
• Modular Housing: more lenders are actively trying to solve this funding issue by funding supplier contracts on an LTV basis
• Transaction activity is high but operationally very slow; planning in particular remains pedestrian due to funding cuts
• There are encouraging signs of lending growing in the prime markets
• Development Exit Finance is a fast growing market but developers must be wary of waiting too late from an LTV point of view

Brexit continues to be a factor in lending appetite, so caution is certainly a buzzword right now.

However, for good projects with able developers, cost effective lending is available from as little as 4.5% from a non High-Street Bank.

16. Could you do with regular free info on the top lenders?

If ‘real-time intel’ appeals to you, learn more about our free seasonal Lender Comparison Data.

Our latest release was on Friday 10th May 2019.

Find out more by clicking on the following link:

Summer 2019 Lender Comparison Data

To continue with the section, click on any of the sections below:

• The Basics
• Preparing for Funding
• Assessing Lenders
• Explaining Jargon
• Did you Know?
• Asset & Liability
• Lender Comparison Data
• Blog
• Free Templates