The specialist law firm claimed that the increase could be partly explained by the rush into development lending in the last five years and difficult conditions in the current market.
Jonathan Newman, senior partner at Brightstone Law, said that it had seen issues arise from a lack of close and regular monitoring as developments proceeded.
“Developers need to understand their particular sector of the market, and operate with [the] right skill set, supported by experienced property professionals, such as lawyers, surveyors and quantity surveyors.
“Development is not just about value, feasibility is just as important.”
Peter Izard, business development manager at Investec Private Banking, said that there were three main reasons.
“First, the market has seen a surge of new inexperienced developers enter the market taking advantage of permitted development rights, the construction industry is experiencing a major skills shortage exasperated by Brexit and [adding] to this, the market has seen an influx of new private equity-led development lenders who have limited experience of the sector.”
However, Chris Whitney, head of specialist lending at Enness, said that he wasn’t currently seeing such a large increase in issues with development loans.
“I think this has a lot to [do with] getting the loan structure and monitoring right at [the] outset with most lenders appointing a reputable QS at [the] outset to undertake a stage one report and then having a suitable monitoring structure in place.
“At the end of the day, all parties involved have an aligned interest in wanting the project to be delivered on time and on budget.
“However, we [are] seeing more and more lenders offering light and heavy ‘refurbishment’ loans, where often no – or very light – monitoring is being undertaken.
“Some of these lenders are not employing experienced underwriters in this field and generally this doesn’t involve a QS at [the] outset or during the project, which I think will prove to cause issues moving forward.”
Are lenders looking at complex projects that they would have previously turned away?
Chris Oatway, owner and director at LDNfinance, said that it was clear that current market conditions had led to an increase in the number of “problem cases”.
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“We have seen a considerable reduction in the amount of development stock available, which has led to greater competition between developers and led to an increase in land prices.
“In a search for greater returns, we have seen our experienced developers targeting increasingly complex development opportunities, which by [the] nature of the transactions increases the number of problem cases.
“Furthermore, there is a general willingness among lenders to consider funding complex projects that they would have previously turned away.
“This is mainly driven by the new entrants to the market, who have a greater appetite for the projects which are potentially more problematic.”
Zuhair Mirza, principal at Avamore Capital, said that while it had not directly experienced such an increase in problem cases, it had been concerned recently that weaker market conditions might result in projects being less attractive/profitable for the developer and may have less room to absorb unexpected costs.
“We would also add that there are a number of newer market participants – both in terms of lender and developers – which may be contributing to an [increase] in non-performing development loans.
“Development finance is often quite levered and therefore it would follow that weaker market conditions would have a material impact on the profitability of schemes.
“In this context, cost overruns can also be crippling to projects as the headroom for any increase in cost contracts.
“We view development finance as cyclical for these reasons and feel that underwriting and management of loans is critical to ensuring that environments like this can be navigated.”
John McNamara, chief executive officer at Focus Commercial, said that the developer or client needed to understand the project feasibility, cost, timeline and profitability.
“The simple solution for this is to carry out a detailed development appraisal of the scheme and follow this up with due diligence so that every sales/cost and revenue is correct.”
Terry Woodley, director of development finance at Shawbrook Bank, explained that it would always look for healthy developer profits in schemes and provided a detailed instruction letter as to what it expected its monitors to comment on.
“Our monitor will also undertake an initial report before we agree to lend.
“To date, we're not seeing any trend in legal issues on development loans, but remain aware of the potential for challenges to arise and find close collaboration with all parties the best defence."