Providing developers with an exit

While we are continually reminded that there is a chronic shortage of housing (affordable or otherwise) in London and the South East, it seems to me that the specialist finance industry has done a meaningful amount to address this shortage.

It is generally acknowledged that it is the small- and medium-sized businesses that drive this country, and it certainly feels true to state that no one has supported small building companies more than our industry has over recent years.

There is, however, one element of funding which we believe could be addressed more aggressively to further assist developers – that element is the development exit funding. 

First, what is development exit funding? At Funding 365, we are happy to write a development exit loan once a developed property has all its building regulation sign offs, a new-build insurance warranty in place and confirmation that all planning conditions have been satisfied. At this stage, the properties are available to purchasers for sale. Our view is that at this stage, the risk of the proposal has dropped dramatically.

The majority of development funding solutions available on the market at present do allow some period of time for the sale of the newly completed properties. However, typically, the interest rates that are being charged at this point remain relatively high – usually at a rate that is set to compensate build risk rather than the risk of market liquidity and sales prices for completed properties. 

Clearly there is a reason for this high level of pricing. Development funders can charge a premium for their funds given that property development is (in my opinion) a riskier proposition than simple bridging. Once a development is finished, the development lender would rather redeploy his funds into a new project at a higher rate than simply sanction a reduction in the rate of interest on the loan at that stage as compensation for the reduced risk profile.

At Funding 365, we have executed numerous development exit projects at exceptionally cheap funding levels to allow borrowers an extended period to market their properties in an orderly fashion. Our development exit proposals include a 65% LTV option at 0.65% per month (no exit fees) or even a 75% LTV at 0.7% per month. There have even been occasions where we have offered 80% LTV financing where the property and developer are particularly desirable. Our largest loan to date in this space was just over £5.5m, which allowed a developer to exit from a development of 36 flats.

We are keen to continue to focus on this space and assist developers manage the sale of their newly built properties. By offering this service, hopefully we are doing our (small) bit to help solve the housing crisis in the South East.

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