Development Finance Q1 update

Discussion has been raised recently on the need for the bridging market to consolidate as it has been reported to be “busting at the seams”. We can draw some parallels to the development finance sector given the surge in activity, but perhaps not to the extent of the congested bridging sector.

We continue to see new development finance options being brought to market, and with some lenders targeting a very specific niche (including Care Homes, Schools and even Churches!) which sets them apart from the crowd, but generally most lenders are still only looking to support residential development schemes. Commercial elements are considered, but the preference clearly is towards residential. There have been instances recently where lenders who would not previously entertain any commercial element, will now do so provided the commercial elements is “sensitized” or discounted, and so only the value of the residential properties is truly factored into the calculations. As fierce competition amongst lenders continues, projects which did fall outside of criteria, might now be looked upon from a different perspective. 

Naturally the banks & institutions remain strict with their criteria and will generally only consider facilities of £1m upwards, but with some now offering up to 75% loan to cost, this demonstrates their appetite to attract new deals. It doesn’t seem too long ago when the general message being received from the High Street was that “new business” was almost impossible to even get through the door of most banks, as they would really only consider existing clients. Now we see almost weekly new appointments of Business Development Managers, and a good number of those being outside of the M25 or further North, and venturing into Scotland, signaling the lenders intent to develop relationships with potential introducers of business.  

Again, interest rates are coming down slightly with development finance facility structures being shaped to suit the developers tastes & requirements. Some developers discomfort with what they see as “heavy” arrangement and exit fees are being tackled with successful negotiations and in some instances fees removed altogether, albeit usually at the cost of a higher interest rate!

In recent Budget news, the Help To Buy Isa came as positive news. The Isa should be available this Autumn, with the government “rewarding” first time buyers with a 25% “bonus” (subject to a maximum bonus of £3k per person), if those savings are used to buy a first home (available on purchases up to £450k in London, and £250k elsewhere). We will take whatever stimulation we can get, and anything which encourages and helps first time buyers to save towards their purchase will ultimately give developers more confidence to build, and lenders more confidence to lend.  More and more projects and developers are getting the “green light” from councils to submit applications for detailed planning consents, to go some way to tackling the housing shortage. 

A recent government announcement confirmed new permitted development rights allowing casinos, distribution centres and storage facilities to be allowed to be turned into homes, however it now seems unlikely that the permitted development of offices to residential introduced in May 2013, will be extended.  

A high street bank has this month launched a "stretch funding" package which adds mezzanine to senior debt, for existing house builders with a successful track record, after a recent survey identified lack of funding as one of the "primary constraints" for their developer clients.

At the same time, investors remain very active in snapping up Buy To Let properties & properties ripe for development, with estate agents generally reporting much more activity than 12 months ago, throughout most of the country.