Development finance 'more liquid and prevalent than I have ever seen in the last decade'

Last week, Development Finance Today hosted a virtual roundtable in partnership with Avamore Capital, on the topic of ‘Is abundant capital finding its way effectively to developers?’

The live event was held on 10th March, moderated by Beth Fisher, editor at Medianett, along with Avamore’s principals Amit Majithia and Philip Gould. 

Over 50 people tuned in to watch the live discussion. 

The panel also included Alice Williams, director at Pilot Fish; Shiraz Khan, managing director at Hank Zarihs Associates; Dean Brown, managing director at Aureum Finance; and Matthew Yassin, director of structured finance at Arc & Co.

When talking about how the availability of funding has changed since the onset of Covid-19, Amit believes there are fewer lenders offering “real development finance”.

Matthew, however, feels that, while there was an initial shock to the development lending market when the pandemic struck, the choice is currently “massive” for brokers looking for this type of finance.

“It’s more liquid and prevalent than I have ever seen in the last decade,” he stated.   

He commented that the redirection of funds from the commercial sector into residential and strong government support, such as the mortgage guarantee scheme, were important factors as to why there is so much cash in this space.

Alice emphasised that, in spite of the abundance of development lenders in the market, finding those than can commit to what they offer at the outset is something “very different”.

“I think the number of development lenders has increased . . . but the number of lenders in whom we have confidence to deliver on what they say they’re going to do is probably unchanged.”

When it came to discussing lender risk and appetite, Matthew considers it to be back to normal in terms of pricing and leverage and, in Arc & Co’s cases, is seeing some of the cheapest debt and most “highly geared and aggressive stances” from lenders that he has seen in the last 10 years. 

“Because of all the funds that were not allocated last year, I think the increased liquidity has given extra appetite,” he added, saying that this, combined with the positive sentiment returning to the market is a “perfect storm”.

He also thinks the mezzanine market has been impacted in a “positive way” with a lot of “cash stacks” going on currently.

However, while senior debt pricing is going down, mezzanine costs are rising.

“Mezzanine debt is appearing more attractive to investors, hence the cost goes up, which means the funding lines are keen to support because the returns are obviously better for schemes that are viable and can be delivered.”

Dean stipulated that the mezzanine market has a big part to play and has made a comeback over the past couple of years. 

“We’ve definitely seen a big uptick in demand for mezzanine and also equity,” he revealed. 

He said that, while there is a lot of competitive senior debt in the market, there are nuances to some of the lenders since the start of the health crisis, such as increasing contingences on the build or extending the term on the facility by another three months, all of which are compounding the land loan, resulting in developers needing to put more money into the deal or look at mezzanine options.

Interestingly, Amit divulged that, over the past nine months, borrowers were asking Avamore for longer terms, rather than the other way round. “They have a sense of, ‘Actually, this might take me longer to get materials and refinance at the back end and therefore I’d like to be a little bit more cautious.’”

Discussing why SME developers may get turned down for funding and how they can achieve more success, Shiraz stressed the importance of using a broker.  

“We’re not having difficulty placing deals; if we take one on, we do our DD, make sure it stacks up, and then put it forward to the funder.”

He claimed that the main hurdles are around valuations, a slowdown in charges being registered with the Land Registry, and not having enough comparable evidence.

Amit noted that Avamore has recently seen a number of applications where planning was a bit closer to expiry than the lender would have originally liked or seen before.

“That probably tells us that developers are still interested in buying those sites with planning, rather than getting it themselves, but there’s probably been a period over the last six to nine months when they haven’t been able to commit for one reason or another but are still willing to now jump in there and implement that planning before it expires,” he said.

“Those are all encouraging signs for us.”

When looking at how government support, such as the mortgage guarantee scheme and the extended stamp duty holiday deadline, will impact the refinance market, Philip said that if residential conveyancing takes longer, it could result in an elongated sales period and the developer needing to extend their loan. This means they will have to refinance at a higher level, which makes it more difficult to exit.

“As we know that’s happening, we have to build that into our sensitivities upfront,” he added. “Although it has provided really good support for the market, it has also created that distortion, so it’s really [about] balancing those two things.”  

The full roundtable recording can be viewed below.

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