Specialist bank entrants will 'diversify' fundable development project types



Some 69% of property professionals expect more specialist banks to enter the development finance market this year, according to the latest Development Finance Today poll.

In light of this, Development Finance Today has canvassed opinion among leading industry figures with regard to what impact this could have on the market and what products may be introduced as a result.

 

Poll

 

Will more specialist banks enter the development finance market this year?


“We expect both new and existing lenders to continue to strengthen their product range by targeting parts of the market that are currently underserved,” said Sam Le Pard, adviser at Arc & Co.

“We’re seeing continued funding demand, especially in the restructuring space, and that should encourage new lenders to come to market.”

Nathan Ellis-Calcott, director at Your Expert Group, believed there was growth potential that would be of significant interest to specialist banks looking to diversify their product offering and capitalise on the lucrative funding requirements the market offers.
 
“What is more likely, and which offers a far more seamless route into the market, is the acquisition of existing development lenders by challenger institutions as seen with Paragon Bank’s purchase of Titlestone last year.

“An alternative option and way of de-risking capital on deployment is for funding lines to be extended by the specialist/challenger banks to highly experienced private offices.”

Paul Green, head of development finance at Hodge Bank, expected to see the number of specialist development finance companies in the UK grow further during 2019.

“With appetite among UK high street banks remaining supressed, other institutions are seizing the opportunity to fill this space with well-structured offerings.”

Callum Ferguson, head of origination at Cogress, claimed that as the SME property development space was massively underfunded and offered huge potential, he expected to see more niche lenders enter the market.

“I think growing competition between lenders is great for SME developers, who need agile, well-priced financing solutions to enable them to scale their businesses. 

“It’s also worth pointing out that, on a national level, these groups are incredibly important for addressing the housing shortage.”


What impact would this have on the market?


“I think this increased competition might also help drive more product innovation in the sector,” added Chris Whitney, head of specialist lending at Enness Global Mortgages.

“One issue I foresee, however, is a lack of experienced staff. 

“Financing developments can only be done effectively if you have experienced people running the operation. 

“I think this will hold some lenders back.”

Callum added that an increase in specialist lenders could bring more housing stock to the market. 

“More competition means more choice for SME developers, a likely reduction in the cost of finance as these lenders compete, and flexibility for developers as the variety of products on the market increases.”

Sam claimed that in recent years many developers had managed to find value in “niche” areas of the market, but had largely been unable to access the same lower interest rates or higher gearing levels that more conventional projects may attract. 

“Specialist banks can fill this void and, hopefully, encourage existing lenders to become even more competitive.”


What products could a specialist bank offer to stand out?


Chris Oatway, director at LDNfinance, stated that one area that could benefit from new entrants was the regulated development finance space between £60,000–£5m, where there are currently very few options.

“New specialist bank entrants will put downward pressure on pricing and diversify the types of development projects that can be funded.”

He added that unique products would not be a game-changer, as development finance deals were always bespoke.

“However, a truly unique product that would get a lot of attention would be [a] 100% joint venture funding with no personal guarantees for a first-time developer.

“Now that would be interesting, but [I’m] not quite sure how long that business would be around.”

Whitney claimed that the last thing the industry needed was someone offering 65% loan-to-cost at double-digit interest rates.

“I think it is easy to see where the gaps and opportunities are and it would be great if we saw lenders coming into this space who have done their research and look to fill the voids.”

Wesley Davidson, director at Fox Davidson, added that the removal of exit fees or charging against GDV was a starting point.

“Lending to higher LTVs or taking into account planning gain [and] reducing loan sizes to accommodate new developers starting out are all ways banks can create an edge over their rivals.”

Sam concluded that there were several areas of the market that were currently less well served than others. 

“It would be great to see development financiers more willing to support build-to-rent schemes, speculative commercial developments or serviced accommodation/HMO-type end products. 

“In addition, it would be good to see more mezzanine finance providers enter the market to foster more competition in that space.”


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