Success Stories

1. Rates & Finance Costs at their LOWEST IN A DECADE

A combination of factors have led finance costs to pre-crisis records.

Low Central Bank base rates have meant the cost of obtaining liquidity from institutional investors has been cheap in and of itself, so plenty of investors have dived in to raise extra funds at low cost, that can be deployed competitively.

The flip side of near zero base rates is that investors have had to leave the safe haven of government treasuries and bonds to find yield producing investments.  The more risky asset of property development ends up appealing where before it would have been ignored by the most risk adverse of investors.

So a combination of the cheap cost of funds and an increased demand for a sector with riskier yield has resulted in an increased supply of cheaper liquidity forcing down retail costs.

On top of this, the Brexit situation has meant that foreign investors see 'a play' on the Sterling of up to 20%.  

It is no coincidence that much of the increased liquidity in the last couple of years has come from US hedge funds.  Whilst Brexit is far from done, the medium to long term view of some investors is to invest now to profit later.

Ultimately increased liquidity means too much money chasing too few deals, and rates/costs drop accordingly.  With the global outlook still uncertain, it remains to be seen how long this may last, but right now it's as cheap to fund developments as it has been in a long time.

2. £20m+ loans have a raft of new lenders entering the market

A huge new supply of funding is in the process of hitting the UK development space.

Investment banks, who once only invested through institutional wrappers, are now actively lending directly to the larger players in the market.

As pointed out earlier, the hunt for investment yield is on as low risk government issuance is producing lower and lower returns.

Rates can be excellent at c.4% with leverage as high as 65% of GDV.

Watch out for more on this from us as this space unfolds.

3. Increased Liquidity sends Max. loan sizes soaring; up to £150m with one lender

A very noticeable trend amongst lenders has been the appetite for larger and larger deal sizes. 

For many lenders, they do the same amount of work for any size of deal, so larger and more profitable makes sense.

With the influx of liquidity already discussed, some lenders max loan sizes have gone from £20m to £50m, and in two cases up to £100m and £150m!

For now at least, there is plenty of capital wishing to be deployed.

4. High Leverage and Low Equity Requests remain stable

Non High Street lenders still have a much looser approach to leverage and cash in, and this has remained fairly constant despite the uncertain climate.

Whilst this is true, the very best of terms are 5% worse off in both cases.

Very few lenders are currently offering 75% of GDV loans, with leverage still capped at around 65-70% of GDV.

This is still much better than the 50-55% of GDV offered by High Street Banks.

Re: Borrower Cash Stakes, they remain low although again lenders are a little cautious.

90% Loan to Cost is still achievable but 85% is often more realistic.  

What lenders are effecitvely saying is we'd like to see the developer put in a little more cash, which is as much to cover the reducing project margins as anything else.

Do however, check your LTV/GDV position with each lender; some work off a 180 day or even a 90 day valuation instead of the OMV, which reduces what they lend further.

5. Sales Liquidity is Key - Particularly in Rural Areas

Lenders do not like being stuck with projects that do not sell well enough for them to exit their position, which means they have to extend the borrower's loan term, force a refinance or in the worst case repossess to sell.

This is particularly the case when the economy is in flux, or sales are generally slow.

Currently, properties generally sell better in urban commuter locations, but that is not always the case.  It is important wherever the site is, that you can evidence good sales volume from local agents for similar units.

With the political scene somewhat clearer, it is hoped sales picking up in the first quarter will improve lender confidence for certain types of deals in areas that otherwise they might not look at.  Evidence of sales volume is key to lender approval.

6. Smaller Loans have fewer Lending Options

One fact about modern day business is the relentless pursuit of efficiency, and lenders are no different.

In development lending, the amount of work needed to complete a big deal is often the same as for a small deal, and when liquidity increases, it tends to chase a few larger deals, rather than seek a lot more small deals.

The trend for rising minimum lending cut offs continues to rise, with many lenders now having a minimum loan size of £1m or even £2m-£5m.  

Indeed only 25% of lenders available in our comparison data will cater for sub £1m loans.  For the sub £1m sector, this means some of the best lenders, with the most competitive rates, have become unavailable.

Our advice is, where possible, seek to borrow more than £1m without of course it being a stretch.

7. JV/Equity Finance Options Still Few and Far Between

100% JV options remain available but the volume of options are not increasing as quickly as many anticipated.

Equity investment is also still fairly difficult to source, with many private investors instead opting for the perceived safety of lower returns in the Peer to Peer debt market.  

Time will tell if this sector ever grows to be what it could, but right now only a few geniune options exist.

8. So Costs are low, but lenders remain a touch cautious...

In conclusion then, after a fairly stable 6 months all things considered:

• Rates and Finance Costs are at their lowest in a decade
• £20m+ loans have a raft of new lenders entering the market
• Increased Liquidity sends max loan sizes soaring; up to £150m with one lender
• High Leverage and Low Cash Stakes remain stable although Lenders are still cautious
• Sales Liquidity is key - particularly outside of urban areas
• Smaller loans are suffering from fewer lending options
• More Lenders will now count planning gain as your deposit/cash in/equity stake
• JV/Equity Investment Options exist but not many to speak of..yet

9. 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 is on Sunday 2nd February 2020.

Find out more by clicking on the following link:

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