Summer 2020 Post Covid Lending Changes
The property industry, like pretty much every other industry, has been shaken to its core in unprecedented fashion this year.
The much hoped for “Boris Bounce” that we began 2020 with has failed to manifest to its fullest and furthermore, the full effects of this terrible, ongoing situation are yet to be fully understood.
In our seasonal market review articles, we usually dissect each part of the market, but with no current clarity, this seems rather pointless.
Therefore. we will take a more ‘macro’ viewpoint in this edition, as we analyse where we are, where we might be going, and what a developer needs to know if one is looking for finance, in need of building soon or in the middle of a loan term for a current project.
In summary then as of June 18th 2020:
- Lending has retreated by 10-15% of the gross loan
- Valuations are still at Pre Covid figures
- A lack of transaction data is obscuring realistic future values
- Borrowers may need to inject as much as double the equity/cash
- Liquidity remains strong despite the above
- Developers are advised to address project margin weaknesses
The macro viewpoint in more detail below:
1. Issues With Assessing The Market
With a total shutdown of the UK property market for 2 months, a number of new issues have made the job of getting development finance that much more difficult.
With a lack of property transaction data with which to compare values, surveyors are in the impossible position of understanding not only what the current value of a property or piece of land is, but also what its future value is over various time horizons, in particular the next 3-12 months.
As a result, the RICS has instructed the inclusion of a 'material uncertainty clause' into valuations, which effectively removes them from any possible liability, and leaves the figure quoted as ‘down to the lender’s interpretation’. Given many were sued in the aftermath of 2008, it’s an understandable position they have taken.
2. Have Valuers Downgraded?
Interestingly, not yet.
Given the freedom of the material uncertainty clause, and the lack of transaction data rendering any number they choose relatively meaningless, most seem to be happy to provide Pre Covid valuation numbers, and leaving the decision on how to view that number with their client, the lender. The risk has effectively been passed to the lender.
3. Where does that leave Lenders?
The decision taken by the RICS has then had consequences for lenders, who now cannot take comfort in the valuation they have asked for.
Most lenders to start with simply stopped lending, but as time went by, most lenders have returned. (The reality is lenders only make money when they are lending, and most will have wholesale investment funds sat costing them money if they don’t return to the marketplace.)
The vast majority have taken the obvious step, given the future is so uncertain, and reduced the total funds they will lend by 10-15%. So lenders who were previously at 70% of GDV, might now only be lending 55-60% of GDV (that’s gross not net).
4. So what’s the best terms you can now get?
If a valuer is going with Pre Covid numbers, then 65% of GDV gross seems to be the max anyone will rise to.
In terms of the net advance, you can take at least 10% off of that figure, and maybe more, as some lenders are now factoring in much longer sales periods.
Where a total term of 18 months was standard, some will only entertain terms of 24 months.
A net of 55% of GDV is a sensible figure to aim for.
5. Where does this leave the developer/borrower?
If you are looking for finance now, it probably means you are going to have to put in quite a lot more cash than you were anticipating.
On a simple 30% margin on a £10m GDV project, where you are being lent gross 70% of GDV, if that lending now reduces to 60% of GDV, that extra 10% drop means a doubling of cash in from the developer from c.£1m to c.£2m. That is also before adding in more interest to cover off a longer sales period, which reduces the net advance further. It is possible with some lenders that this won't be the case, but for most projects it will.
6. What could the future look like for valuations and Loan to GDV%?
This will very much depend on the post Covid property transaction data that we see. This will take a while to come through though, as it is normally around 1-2 months behind. Given transactions are only just beginning, to get a picture of June won’t be known until mid August using the ONS House Price Index. So the current set up will be in existence for most of the summer it would seem.
The noises coming from lenders is that they want to up leverage, which makes sense as they know deals using the current leverage will be greatly reduced. However, it is likely that once transaction data is known, valuers will at some point remove the material uncertainty clause and go back to current transactions. Offers are projected to be 10% lower, and the current estimate is valuers will downgrade around 10%, although the market has reopened in bouyant fashion from a demand perspective. So potentially what you make up for in lender leverage, you lose in GDV valuation.
Essentially, it is likely that lenders have priced in the coming valuation downgrade that will appear later this summer and into the Autumn. Of course nothing is set in stone, so we will be monitoring this and updating this piece as we go through the summer.
7. Get finance now or wait?
If you believe that site GDVs will be downgraded in a few months when transaction data returns, then there is an argument a developer should get funding asap. This is because with downgraded GDVs, it is possible that project profit margins that both developer and lender rely on to work together will have been eroded to the point where the lender won’t be able to offer terms.
Lenders typically need to see 20% profit margins, and some will go a little lower. However, if the margins are a lot lower because of the downgraded GDV, the lender may well say the site is not viable.
The above does assume that the costs will not reduce in tandem, so it may be a case that land prices will reduce and so too will build costs. It depends what your view is, and what you are willing to accept in order to get financing and push on. So much though is still unknown.
8. So in summary….
- Lenders are lending around 60% of GDV gross right now, 65% is possible from a couple of sources
- Interest Rates are around the same or slightly higher
- The borrowers'net advance from the lender is likely to be less, whether that is through a lender Loan to GDV % restriction or a future valuation downgrade. It’s likely a borrower will need to put down more cash to support a deal now than Pre Covid, possibly as much as double.
- Make sure your project profit margins work, for both you and a lender.
- It may be wise to get a cash injection. ROIs are going down but more cash will be needed with lenders advancing less
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.
Find out more by clicking on the following link:
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
- Free Templates
Latest Market Data
7 Easy Ways to slash 50% off your development finance costs before you start!
To access the marketplace Lender Data, please submit your details