Development finance lenders and borrowers – what do they look for in each other?
By GuyMurray, Head of Department for Development Finance, West One Loans
We are more than two months into the new year and going through two more months of lockdown before a gradual opening up of restrictions. Of course, the Covid pandemic has had an impact on property developers but despite this we have had a good start to the year.
Development finance firms want to lend and property developers want to borrow and build. But what are lenders looking for in developers and what is the best way for them to secure the finance they need?
Firstly, development finance lenders are looking at what experience a borrower has in building or renovating property. When applying for a loan, a lender will want to see that a developer has successfully worked on a similar type and value of development. Experience is important, especially in a challenging market, and the developers we work with must have completed at least two successful projects.
Lenders will also assess what assets developers have behind them and their cashflow position. In the past, lenders looked for 5% contingency allowance to cater for any unforeseen circumstances, but this has now increased to 10% in many cases. Covid has brought in a new complexity with labour and building materials not always being available, which can result in delays on the project.
there has been a short supply of plaster and plasterboard, for example, due to the closure of factories during the first lockdown. Although it is possible to get plaster, lead in times to order it and buy it can take longer. It’s the same with other construction materials such as timber and roof tiles.
Prudent lenders are also encouraging developers to take out a development loan for at least three months longer than they think they need it. This provides extra time, just in case the development takes longer than expected, either to build, to sell or refinance if this is the exit route. The option to pay off the loan early if there are no delays is more convenient and cheaper than having to rearrange new finance.
What should developers and brokers look for in a lender?
Last year highlighted the importance of making sure that a lender is financially robust and has a solid form of finance behind them – particularly for developers wanting staged payments. Lenders who are backed by institutional funding are likely to be around for the long term.
Covid has impacted on the development finance market with some lenders having to stop lending, either temporarily or permanently. Peer-to-peer lenders tended to struggle as they were reliant on retail funding. They needed to ensure any liquidity they had was going towards supporting their existing loan book and many had to stop lending on new loans.
Those providers who have continued to lend throughout the pandemic would typically have more prudent underwriting policies and a secure source of funding. This approach has ensured their longevity in the market which all lenders should be focused on rather than short term wins. The casualties within the market are likely to be the funders who pushed up loan to values and did not have stringent enough credit policies.
With the imminent easing of the latest lockdown and the vaccination programme continuing at pace, I expect 2021 will be a busy year for development finance.
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