A recent poll conducted by Development Finance Today found that a staggering 85% of industry professionals felt that not enough lenders were funding land acquisitions, with the remainder taking the opposing view (15%).
Chris Whitney, senior broker at Enness Development, said that if you asked a broker or developer the same question, they would almost certainly say no.
“The more lenders there are, the more competition there is (in theory), which benefits the borrower.
“Overall, I think the market right now is pretty well serviced by a range of specialist lenders, but the key issue is what we actually mean by ‘land’; it isn’t really possible to pigeonhole a particular lender as one that is good at lending on ‘land’ without being more specific.
“If we have a relatively large strategic land acquisition (I am talking north of £10m), then we are generally dealing with an experienced and sophisticated client.
“With housing in the UK under pressure, such sites are generally included within a local authority’s housing plan and relatively easy for a lender to assess its merits and evaluate the risks.
“Much smaller land acquisitions can actually be harder to fund if no planning is in place at all, i.e. ‘back garden’ opportunities.
“Ultimately, the availability of funding on any specific land acquisition comes down to the client/broker ability to evidence that the project is viable and downside risks can be mitigated with an alternative exit strategy alongside responsible lending practices from the provider of funds.
“Personally, I think we have a varied choice of lenders in the market right now who are able to service most of our needs in respect of funding land [acquisitions], as long as it makes sense when these ‘cannons of lending’ are applied to the proposal.”
Risk vs innovation
Nathan Ellis-Calcott, director at Thistle Finance, believed there weren’t enough lenders who funded land acquisitions, but claimed it was hard to point the finger.
“Lending against land is inherently risky and it's no surprise the market is fairly restricted.
“The glacial pace at which your average planning department operates is only exacerbating the situation.
“What lenders there are offer much the same products – rarely venturing above 50% LTV without, at the very least, outline planning consent.
“But again, it's the level of risk involved that's limiting innovation.
“There's certainly an opportunity for a new lender or two to come in and grab market share, but I won't hold my breath.”
How do lenders view land acquisitions?
Gerard Morgan Jackson, head of structured finance at United Trust Bank (UTB), said there was no disputing that land acquisitions were harder to fund.
“A number of lenders will not support them, even for existing clients.
“At United Trust Bank, we view things differently.
“We are able to leverage clients’ portfolios, enabling them to purchase those hard to fund assets and typically giving them time to obtain or enhance planning before funding the build through our development finance division.
“We are able to support developers throughout the lifecycle.”
Simon Brooks, co-head of origination at Investec Structured Property Finance, added: “Land acquisition is always difficult to fund with many lenders moving away pointing to the lack of any identifiable cash flows from which to repay the loan.
“Many borrowers will only seek modest gearing against development land as it is recognised that with typical senior debt being at 65% [loan-to-cost] for the eventual development, they will need to pledge significant equity into the project.
“In some cases, borrowers will try and justify a loan on the land with low LTVs, however, this is effectively pawnbroking, which traditional lenders would be right to steer clear of.
“Similarly, if a lender does consider one of these scenarios, it is likely they will want to impose lots of controls and restrictions on their borrower, [for example], planning to be submitted within certain timeframes and very short loan terms, which does not always align to the complex, time-consuming and political planning process a borrower will have to navigate in order to get the right planning approval.”