Bob Hide

Housing developments: managing risk can bring reward

In the face of economic uncertainty and with development finance increasingly hard to come by, putting forward a solid business case when approaching lenders is essential.

As part of this process, adopting a thorough approach to identifying and assessing risk from the very beginning of a project is key, but where should developers start and what should they consider?

From the amount of experience a property development business has to the type and size of the projects it has completed, developers are typically subjected to lender scrutiny across a number of areas when seeking funding for their construction projects. As such, even firms in a strong financial position, with a healthy order book, can find the task of convincing lenders to make an investment both challenging and time consuming.

As a capital-intensive industry — where projects can take around 12–18 months to complete, dependent on phasing and external factors such as planning — a prominent issue is cash flow. Until the construction phase of a project is complete, and assets are sold, developers will not start to move into positive cash flow, let alone receive any real return on their investment, and may, therefore, struggle to maintain a viable cash position. Delays can occur for a variety of reasons, heightening the perceived risk for lenders. For example, it could take longer than expected to secure planning permissions, complete site preparation and clearance under ecological constraints, arrange utility connections or procure the right contractors. Ultimately, this perceived risk could put the overall success of a project in jeopardy.

Conducting a thorough risk assessment at the start of a project can help property developers to put forward a robust business case to lenders, boosting their chances of securing funding for their projects. Where developers have a portfolio of projects, which have reached different stages, this can encourage lender interest by helping to distinguish between their individual risk profiles. While not strictly a requirement of gaining planning permission, a detailed risk assessment may also help to swing decisions in a developer’s favour by showing a high level of rigour in their planning processes and a detailed understanding of the local environment, enhancing their credibility.

In order to provide lenders with more detail about the complexity of a particular project, developers should begin by defining all relevant stakeholder groups — from procurement teams to planning officers, architects, local pressure groups and residents. They should also assess the project in terms of its sensitivity too and consider any impact this might have on its risk profile. Gaining a detailed understanding of the interdependencies involved in a particular project will provide the developer with a clearer picture of key risks, such as factors that may lead to failing to complete on time or on budget. Once these risk parameters are established, the developer can put in place appropriate mitigation strategies before approaching lenders.

As part of the risk assessment process, property developers should also take into account the project’s local and environmental context. For example, if they are intending to build a large block of residential flats, they should consider whether there is sufficient space for parking and land is available for utilities. As areas and levels of scrutiny will vary from lender to lender, an effective risk management approach should involve understanding their individual requirements and ensuring these are met.

Conducting a detailed risk assessment at the planning stage will allow property developers to address any weak points in their business model and put together a compelling proposition to entice lenders. However, it is also important to remember that the risk profile of the project is dynamic and improves significantly, for example, once planning permission is granted. As such, it’s essential to keep risk assessments under review and renew them at each major project milestone.

With market uncertainty expected to continue over the coming months, conducting a thorough risk assessment at the outset is increasingly important. Taking this approach can help to reassure lenders and enable property developers to secure the finance they need to drive through profitable projects.

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