Four ways developers can access finance in an increasingly challenging market
By Guy Murray, Head of Development Finance, West One Loans
Most have become accustomed to the UK's housing market which has been thriving, more recently, since 2020, with the supply not even coming close to meeting this ever-increasing demand. This is unsurprisingly leading to house price inflation consistently in double-digits.
Now, however, it appears we could be standing on the precipice of change.
They say, good or bad things always come in threes. Well as bad things go, we currently have a "perfect storm" that could create a completely different landscape in the property market.
Interest rates are at their highest for over a decade, and there's the very real potential that they'll keep going up. Inflation rates spiralling out of control and consumers are lacking confidence in the economy. This all means that we could face a decline in the pricing of houses or at very least, sluggish property values.
As the UK's property development endures this "perfect storm" the prospect of it persisting for the foreseeable - or perish the thought, getting worse, means we need to be vigilant on how this will affect the property market.
A slump in house prices invariably means a slump in GDV for developments.
This has the potential to not only reduce confidence of domestic investors but that of the more cautious amongst overseas investors who might turn their sights away from the UK property market to what they may deem to be more sound returns.
When considering that a key source of funding for what has been an ever-increasing glut of short-term finance providers, developers, especially the less experienced might find their options thinning in the short to medium term.
That's especially the case as, historically, when the industry conditions start to get tougher, financial institutions will look to safeguard their portfolio and maintain revenue, by getting increasingly tougher on their lending requirements.
You might think that lenders would withdraw funding for less experienced developers completely, however that couldn't be further from the truth. It just means that developers may need to be more aware of the additional criteria lenders would require.
Four Ways Developers Can Access Finance in an Increasingly Tougher Market
1. Control your costs
With Brexit, the pandemic, and the invasion of Ukraine by Russia, we find ourselves in the perfect storm of mass financial uncertainty which is not helped by rising costs of materials and labour not to mention the shortage of workers.
An analysis of our loan book suggests that while the vast majority of developers are on track to complete within the allocated build costs of their loan facilities, a tenth forecast cost increases of up to 10%.
Development costs that are higher than the norm could be a red flag for some lenders so it's vitally important to assess project costs as much as possible even before committing to a purchase.
Not overpaying for the land allows you to carry out the development with little worries that your profits might be at risk due to any cost uncertainty.
In the same vein, it's essential to also build good, long-term relationships with building merchants to maintain your costs wherever possible.
2. Eco builds can pay dividends
Westminster is pushing to make the UK's housing market more environmentally friendly, with landlords mandated to make their properties more efficient from 2025.
As the cost of energy continues to rise certainly, thanks in part to Russia's invasion of Ukraine, it's now more important than ever to construct buildings with the highest energy efficiency as possible from as many alternative sources as possible.
High efficiency homes and buildings have always commanded a premium, but that premium has steadily risen thanks to recent events and will continue to rise, as the energy crisis deepens.
This, in a way, is actually good news for developers as the increase in revenue can more than compensate for the escalating costs associated with materials and labour costs.
3. Find the best lender for you
As mentioned, there's a great deal of lender competition in this sector of the market, giving developers a plethora of options when they come to sourcing their funding.
However, it's perhaps now more imperative than ever to partner with an established and respected lender which has heightened degrees of funding certainty.
As seen on a smaller scale in the industry, newer and smaller lenders often have less secure funding sources with the potential to either pause or evaporate under tough market conditions.
It goes without saying, but the last thing any developer wants is volatility in their cashflow, as such, it pays dividends to do your due diligence when choosing a funding partner.
That's where an experienced broker comes in handy. Not only will they be able to help you navigate lenders' requirements, but they'll also have insight into which lenders have an appetite to lend and which ones have sound funding arrangements.
4. Different financing solutions
When looking to financing your development project, your first thought may be to talk to the lenders on the high street. However, specialist finance firms can offer alternative multi-product funding solutions and often a faster less complicated process.
There are numerous schemes offered by Westminster that can help with development and infrastructure cost as long as you meet their eligibility criteria.
And though it's likely that their criteria will be tightened, finding yourself a strong equity partner and or mezzanine finance provider may become key in the hard times ahead to plug any gaps.
Great property developers will know that risk can never be eliminated but only mitigated and that with risk comes opportunity and consequently, there will undoubtedly be opportunities amongst the trickier times ahead.
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