Zuhair Mirza

How to build out a successful and sustainable development scheme



The UK economy is still facing uncertainty due to the further extension of the Brexit deadline.

While the property market is continuing to act with relative caution, the changing date has created some breathing room for developers to move ahead with projects. There is more of a can-do, will-do attitude in the sector, which should drive the market forward in the next few months. Although there is greater willingness to develop, all parties are looking to safeguard schemes as much as possible, and from a lender’s perspective, there are a number of steps a developer can take to secure funding and build out a successful and sustainable scheme.

Considering costs

We are seeing that GDVs are falling, build costs are going up and there is increasing cost pressure due to labour/skills shortages. While little can be done by the developer to control these factors, it is helpful to strike the right balance on a development appraisal. If the total cost of a scheme is weighted heavily towards build costs, as opposed to the price of the land, the lender may consider the scheme to present greater development risk. Small movements in the GBP:EUR exchange rate could lead to a significant cost overrun, which will be concerning if margins are already tight. Considering schemes in strong locations, where the land value is a greater portion of the total development cost, does provide a strong mitigant for this risk, it is, however, not a defining factor as to whether finance is available and does not deter development finance-focused lenders.

Project type

From a lender’s point of view, the project type is more important than ever. End products — which can be retained on buy-to-let mortgages in case of slow sales, or fall into the Help to Buy bracket — will be much easier to fund at this stage. Demand for properties which qualify for Help to Buy remains high (particularly when compared with a high-value, single unit) and these schemes are likely to offer a number of alternative exit routes. Smaller-ticket units, which also have strong rental demand, can be refinanced on to a buy-to-let mortgage and investor demand for rental income remains strong in the UK. As long as the developer has prepared for a slow sales market, a lender is able to move forwards.

Loan terms

As a result of market uncertainty, developers will need to factor in increased loan terms. While in times of market buoyancy, developers (and lenders) can draw on previous performance in order to justify reduced terms, in times of uncertainty, developers should be prepared to take on an extra few months to ensure timely completion of their schemes. Factoring in longer loan terms results in a lower net leverage from schemes and, by extension, results in larger equity requirements. This in turn reduces returns for developers and so it is an important factor to consider when assessing a scheme. 

Conclusion

While the UK property market is experiencing a degree of uncertainty, developers are able to move ahead with confidence and obtain finance as long as they take the appropriate safeguarding steps. The key for a successful project from a lender’s perspective is to ensure that as many eventualities as possible have been considered and the project can withstand unexpected changes in the process.


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