UK housing

Development finance: The devil is in the detail

Whenever I think we have reached a plateau of new development lenders in the market, it seems there is another surge of funders offering development finance products.

I find this to be a very positive thing for our market and ultimately this should, in theory, benefit the consumer. Ultimately, we are beholden to the usual market externalities, including all the fun and games occurring in the political world, alongside the very real possibility that inflation, and subsequently interest rates, will rise in the near future.

Conversely, the practices and structures that we see in the development finance world remain largely unchanged. There are a handful of ways that different lenders like to fund development projects and they all have their strengths and weaknesses. The end result should be to provide maximum liquidity for the developer, which should allow for a smooth and successful development project.

Theory is all well and good. However, in practice, all lenders need to anticipate a range of things going wrong. The beauty of development funding is that there are a million and one problems that could occur on site: from an increase in build costs to an ecological issue such as bats and newts on site. When it comes to development, detail is paramount.

I was recently on a long-haul flight where I enjoyed watching ‘The Big Short’, a dramatised version of how the 2007 credit crunch was triggered by adverse mortgage lending in the United States. There is a scene in the film when – before all hell breaks loose – the protagonists start to investigate some of the sub-prime mortgages at the time by using a very simple method: they actually went and looked at what was being lent on. While development funding is a world away from typical mortgage lending, the principles are still the same. All good lenders should look at what they are lending on and at times in our busy world we perhaps get far too reliant on our trusted surveyors to look for us. 

As a result of this, I have to add that I go through suits at an alarming rate given how often I’m caught going up and down a ladder and carefully manoeuvring round our development sites. We see every site that we lend on; meet the client face to face and nothing gives you a better impression as a lender on what the funding is tied up in. 

At Regentsmead, we have developed a traffic-light system of basic indicators to look out for on-site – and even when observing the local area – to ensure that the project is running smoothly. Obviously not everything will always get picked up beforehand, but a good development lender should have sensible practices in place such as these.

There isn’t one single fool proof way of funding a development scheme, but a lot of what we have learnt and put in place at Regentsmead is a product of the test of time. We have had our share of site problems to deal with over the years, as is the nature of property development funding, but there is no substitute for experience and I hope that our fellow development lenders can share the same sentiment. Detail is everything in our world.

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