Michael Dean

How can innovative lending support developers in a changing climate?

Property development has always been challenging for developers because there are so many unknowns and, by extension, development lenders also encounter most of these difficulties.


Buying land is always competitive and after purchase, at the start of projects, ground or other environmental conditions can often throw up unanticipated issues; during the build out more problems can often follow. Finally, when the units are built, a weak economy, rising interest rates and a sluggish housing market can also provide an unwelcome environment to sell into and this softening housing market is leaving many units open to being refinanced on to BTLs rather than being sold.

In recent times, lenders, borrowers and brokers are finding that the ‘unknowns’ and their consequences are becoming increasingly intensified due to a number of additional Brexit-driven factors. Key challenges include unexpected construction delays and cost overruns, both of which will have a significant negative impact on schemes. The result is that development projects are becoming riskier, profit margins are being squeezed, project viability is falling and so, development finance is becoming much harder to source.

From a lender’s perspective, remaining prudent in uncertain times is important in maintaining a strong loan book. Notwithstanding that, lenders have to understand new borrower circumstances and be dynamic, responsive and innovative in their approach to providing solutions to the problem.

Making adjustments

A slowing sales cycle over the past 12–24 months has been one of the key issues for developers. Borrowers are increasingly being forced to rent their units in the short term because they cannot secure sales. There is some indication that lenders are becoming more familiar with non-institutional sponsored BTR/PRS schemes which provides some comfort to developers obtaining finance at the start of their projects. However, this adjustment does not address some of the other key market-driven issues.

Notably there are an increasing number of scenarios where the developer has been unable to complete the project within the expected timeframe due to a lack of available labour. Even among the UK-born labour pool, there is a demographic issue with skilled workers retiring faster than younger apprentices can be trained. As a result of these factors, many are finding that they are running out of time on their existing build facility with works still left to complete. Similarly, rising construction costs creeping up over the life of the loan has meant more good borrowers face cost overruns beyond their control which their current development lenders cannot fund. Under these circumstances, the borrower is often at too late a stage to obtain a refinance or does not qualify for a straightforward development exit and so is essentially stuck on the project. In many of these cases, the strength of the scheme is clear against a backdrop of a somewhat difficult scenario and in Avamore’s case, the lender is able to assess projects with a development ‘lens’ under its finish and exit product. 

The finish and exit and increased comfort in BTR/PRS schemes are both indicators of the lending market understanding the needs of today’s borrower and working around that to help drive the market forward.

Lending as a service

Avamore’s latest market report identified that many lenders have recently tightened up on criteria and are reducing leverage at a time when developers have less equity available from past projects. This, combined with downwards pressure on profit margins, is preventing many developers from moving ahead with projects. Development finance is a collaborative process and so funders need to collectively find solutions to these newer issues, while also maintaining a thorough due diligence procedure. 

An approach we’re taking at Avamore is ‘finance as a service’ by finding ways to help customers beyond providing a core product. One example of this is our regular assistance in structuring the capital stack, introducing (without any extra charge) both mezzanine and/or equity participants into a deal to fill potential funding shortfalls. 

It is this collaborative service-based approach which development lenders will increasingly need to adopt in order to allow developers, lenders and brokers to keep flourishing.


In summary, development has always been hard, but with the increased uncertainty we face, it is harder than ever. Development lenders cannot work miracles, but we can try to find innovative solutions to make life easier for our broker and development partners. Development finance is very much a partnership with the fortunes of both developer and lender intertwined so it makes sense for the lender to be collaborative and increasingly find ways to make our customers’ lives easier and more profitable.

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