Top 5 considerations for developers to secure finance
By Guy Murray, Head of Development Finance, West One Loans
The Covid pandemic has impacted on everything and, like many other industries, property developers have had to weather the storm.
Accessing finance for development projects has had its ups and downs over the past year but confidence is picking up with the tapered lifting of lockdown and the vaccination programme. As lenders we must ensure our borrower clients are solvent, have realistic expectations of their projects and consider that things could go wrong or there might be delays. Here are five things developers should think about.
Prove financial stability
It is important for lenders to assess the net asset position of borrowers more than ever before. Property developers need to show strong financial stability and liquidity so they can navigate their way through any problems they may face with any development sites. This could involve an increase in costs or a slowdown in sales. Developers must be able to show they can handle this without relying on external funding sources.
Building in extra contingency allowance
Generally, the minimum expectation for development finance lenders is that developers should have a contingency sum of 5% of total build costs to cover for any unforeseen circumstances.
However, over the last year we’ve preferred to see contingency sums more towards 7.5% or 10% of total build costs. This will provide more of a cost buffer for developers who might be struggling with increasing build costs, shortage of labour and time delays which all push costings higher.
Increasing loan term due to potential delays
It’s no secret that given the impact of Covid, development programmes have been put under immense pressure along with more time delays within sales periods. This has meant lenders will naturally err on the side of caution and want to build in extra buffers within facility terms.
Generally, we are increasing terms for a further three months than prior to the pandemic. If developers are trying to maximise the amount of day one monies towards a purchase within a development facility, they might push back on this. This is because it will require a higher interest sum within the facility which leads to a lower day one sum available.
There has to be a sensible conversation here with developers to ensure an appropriate length of term for both parties.
Analysis into development finance exit position
We’re finding it’s important to assess the exit of our development facilities in regards to longer term debt options to enter into if sales are not forthcoming.
We are assessing a lot of facilities by looking at whether our buy-to-let offering would provide a useful exit for the developer should they not be achieving the sales levels they expected. This allows them to refinance onto a lower interest baring facility if they wish to hold finished stock and sell later down the track.
Changes in LTGDV
Prior to the pandemic generally the market was offering leverage at 65% loan to gross development value (LTGDV). However, there were also some lenders with appetite within the market to push this up to 70% LTGDV. I think the appetite now is maximum of 65% LTGDV and lenders won’t be prepared to take on the extra risk to push to 70% LTGDV.
During the pandemic, the general consensus was to pull back to 60% LTGDV but there’s a bit more confidence in the market now. So borrowers should expect to obtain 65% LTGDV funding for the right schemes right now.
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