The lending market is undoubtedly in an interesting period of evolution, as less than a decade since the credit crunch, lenders are on the one hand anxious not to repeat the mistakes of the past, and on the other constantly on the lookout for new angles, niches and opportunities.
In striking the balance between risk awareness and keeping up in a competitive market, lenders and brokers are striving to be creative and innovative.
Their clients – property developers such as Primesite – find ourselves facing moving goalposts, and that is no bad thing: I would argue that the goalposts need to be moved to keep pace with market movement. If lenders evolve their interpretation of (and approach to) risk – and their product offering – they will find that some of today’s new breed of developers represent a rich seam of opportunity. And we need to stay agile and flexible, so we can move between different funding models. For example, Primesite recently funded a completed development with a mixture of off-plan sales and development finance, a balance we needed to calculate very carefully for maximum efficiency.
The property lending market is in an interesting period of evolution
Every developer aims to position itself as far down the risk spectrum as possible in order to move its funding from bridging, through construction finance, to senior debt. Without a long-established portfolio of completed assets to demonstrate yields, a developer will be considered a risk and often overlooked for certain products – yet there are many other factors that could be taken into account, and if a forward-looking lender were to consider these, they might find some attractive opportunities to write new business.
Loan-to-value v loan-to-cost
The principal lending criteria is LTV. But how this is calculated is worthy of discussion. In reality, lenders most often use a loan-to-cost model, which produces very different results.
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For example, we recently acquired a piece of land that is now valued at £7m, yet thanks to a combination of timing, relationships and deal-making we were able to close on £5.5m. Most lenders would look at the £5.5m paid and calculate the LTC accordingly, yet by looking more closely at the underlying true value of the asset it would be possible to bring the LTV significantly down into the realms of lower risk.
Lenders will always gauge risk based on a developer’s track record, and rightly so, but this too can be reappraised. Traditionally, if a developer did not have many years’ worth of back catalogue up and running, they would be automatically disregarded for certain types of funding.
There are, however, several other factors and key indicators that can build a picture of the true lending risk of the developer. I would recommend that lenders and brokers consider a few key questions when assessing a lending decision:
First, what is the true value of the site? Following on from the LTV point above, if the developer can demonstrate that they are already sitting on some equity before the project even gets under way, this gives a financial buffer and, therefore, some comfort to the lender.
Second, look at the deal-making track record of the developer. Have they consistently been first to the table, making savvy deals and acquiring the highest-potential sites for the best prices? This is a strong indicator of their commercial credibility.
Next, ask about their sales performance. Are they able to sell units off-plan and after completion? Are they expert at putting the right product on the right site, delivering to a market that needs it? If their sales are working, they will be a safer bet.
Another indicator of excellence in deal-making is the ability to achieve planning gains. Have they managed to do the impossible, perhaps getting an ambitious design through planning and elevating the potential of a site beyond its original intended use? Has this created excitement in the community and the property market? Reputations for such expertise are hard-won.
Quality of product is a useful gauge of longevity. If a developer does not have many years of history on their side, the next thing to look at is evidence that they will be around for many years to come. If they are only looking to make a quick buck, quality will be the tell-tale sign. But if they are a long-term concern, they will be demonstrably able to deliver on time, on budget, on spec. Better still, if they can show thoughtful design and build innovations and details that go above and beyond their competitors, lenders should take note.
Sometimes, a developer may be able to answer every one of the above questions, and only require the final bit of cash to close out the deal. In such cases, lenders might find that customer to be an excellent prospect.