Ellis Sher

Developers must know who they are borrowing from ahead of leverage and price

More than 10 years on from the global financial crisis, there is an abundance of liquidity for new speculative property developments, with lenders fiercely competing for a share of the market.

In 2008/09, I could count the number of lenders on one hand. In fact, Maslow’s first deal in 2009 involved a part-built residential development, where the high street lender subordinated their debt to make way for us so we could provide the finance necessary to deliver practical completion. The LTV on that loan was 5%, our headline interest rate was 15%. Yes, you read that correctly. How things have changed.
Over the past decade we have swung from the importance of liquidity to the importance of leverage and price and we will swing again, but perhaps with a different emphasis this time. Diverse financial models have been developed over the last 10 years and the development lending market is now a mixture of funders, including listed vehicles, P2P platforms, special purpose lenders, new challenger banks, retail bonds and institutional funds covering the spectrum of fixed life vehicles to evergreen reinvestment structures. 
Borrowers need to consider the source of the underlying funds that support a lenders’ balance sheet. When the going gets tough with contractors hitting the wall or sales slow down, how will the lender react? Is the lender’s patience and support restricted due to an inflexible or just-in-time funding model? Borrowers must drill down and not take for granted that funding will always be available to meet their next drawdown. We have first-hand experience where borrowers are seeking to refinance existing debts away from funders that are unable to continue funding their schemes. Reasons vary from funds reaching their end of life to single, counter-party limits being breached.
Many non-bank lenders operating in the development finance space have not experienced a downturn and have not prepared their sources of capital to fund through the cycle, remain patient and supportive of developers who are doing the right thing. With market uncertainty upon us, developers must know who they are borrowing from ahead of just leverage and price.


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