I thought it would be helpful to share my musings about the development finance market and break this down into decades from the year 2000 to 2020 and beyond.
If we look back to the late 1980s/90s, securing debt was something that consumers and entrepreneurs went to their local high street bank and bank manager for (or even the Griffin at Midland Bank). People were extremely loyal to their banks, which included the likes of the Midland Bank, Lloyds, Barclays and a raft of building societies. Whoever you banked with, you went to them for everything and the bank manager had to be well versed in a variety of finance types and, at the same time, provide a highly personalised service.
The world of development picked up pace during this decade and this presented growth opportunities for SME developers among the larger housebuilders who dominated the market. This demand led to a huge increase in development finance and the bank’s lending books. Banks had to scale up their resources and they suddenly needed an in-house asset manager, underwriter and administrative staff. This turned into a large and expensive set-up for banks to sustain. In 2008/09, the market crashed, and the banks had a lot of staff and costs which had to be disbanded in order to survive the turbulent times. This led to the industry changing how it lent and how the clients were advised.
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This decade saw dramatic change in the lending landscape and the process of lending and borrowing became much more difficult. Large retail banks and insurance funds still needed to lend to make a return, but they no longer had the teams that could originate, underwrite and manage the loans. Due to internal risk, but also time constraints, banks and institutions decided to fund new specialist platforms and this change in strategy was the single most important change in the lending market. The platforms were formed of small teams of specialists who had/have limited time and they became reliant on the strength of the adviser and this person’s knowledge of the sector. This is where broking moved from simply introducing to advising. Clients were also in a new market: their banks were no longer ‘theirs’ and they became reliant on advisers to structure their debt requirements with lenders who were relatively unknown. This created the adviser/client/lender axis and all parties became reliant on the adviser to create trust within the relationship.
Due to a lack of confidence in the market, the past few years have been challenging for developers and there is now an increased need for equity due to lowered sales prices and stock taking longer to sell. We have recently seen lenders such as Ironbridge – which provides mezzanine finance — acquired by equity provider Orlandis to offer mezzanine and equity propositions.
The product market is now changing so it can better meet the needs of clients. However, further education on how debt solutions can be reached using a range of products will be key.
So, beyond 2020, enhanced knowledge of debt solutions will be key through consistent education. This will raise industry standards and continue to professionalise people, companies and service offerings. The challenge will be finding a happy medium between the professional, but personal offering. Perhaps we all need to go back a few years and mimic some of the qualities displayed by the Midland Griffin…
This article is part of a series for Development Finance Today that will go beyond market updates and talk about the changing needs of talent, the development finance market and how it has evolved over the years, the lender/client/broker dynamic, technological advancements and increased visibility/consumer empowerment.