Lending lifeline in uncertain times

Suzie Mayes looks at the lending landscape for developers seeking finance for their schemes. She speaks to lenders who can help SMEs in a resilient housing market

Small housebuilders have enjoyed quite a lot of attention recently. In October, the government launched the £3 billion Home Building Fund, aimed at smaller outfits. The Home Builders Federation followed with a report, Reversing the decline of small housebuilders, which examined the barriers – including availability of finance – that have led to the deterioration in SME numbers over the past 30 years. And in the Housing White Paper the government highlighted the importance of SMEs to housebuilding.

(Pictured) Stuart Parfitt, md of BLG Development Finance, (left) on a site visit

However, as Housebuilder revealed in March, access to the previous incarnation of the Home Building Fund has appeared problematic. A Freedom of Information request showed that less than half the funds were used in the more than two years before the scheme – originally called the Builders Finance Fund – was rolled into the new one. But, while state support remains laborious and high street banks continue to demur, there are still a number of specialist lenders keen to fund smaller housebuilders’ projects.

What will surely assist any scheme is the buoyant economy and generally robust housing market that endures. “For all the geopolitical uncertainty, the UK economic outlook doesn’t seem so bad,” comments Stuart Parfitt, md of BLG Development Finance. “GDP is growing, albeit at a modest level, unemployment is low. The UK seems to be close to that much coveted ‘Goldilocks economy’”.By this he means ... "just right".

“Interest rates are at historic lows and with mortgage finance readily available and cheap, the residential property market should offer an attractive place to be and housebuilding a manageable risk,” he adds.

The housing market is reassuringly stable, agrees Keith Forster, owner of Property Finance and Development (PF&D). “It’s all fairly solid although developers are being cautious and not too ambitious. There’s no issue with selling stock.”


(Pictured) United Trust Bank provided a £970,000 facility on a nine-unit residential scheme close to Dartmoor National Park by Belfield Developments. UTB was satisfied with the company's previous projects, and there was evidence of strong demand for the planned properties in the locality and at the target prices proposed

Following the Brexit vote, mainstream housing markets continue to exhibit strong levels of demand and sales activity, observes Paul Keay, property development director of United Trust Bank. “We’ve funded a variety of developments, in various locations around the country, comprising typical family and first-time buyer-suitable homes which have come to the market in the past few months and are all showing good levels of sales on the completed units and lots of interest on pre-sales.” But one area of struggle – unsurprisingly – is prime central London, Keay notes.

Stephen O’Brien, md of Wolsey, picks up on this theme of weaker markets: “If it's the right segment of the market things are looking ok,” he says, adopting a more cautious view overall. “Certain parts I’d describe as more challenging. The upper end of the market over £2 million where there are stamp duty changes or overseas buyers – they're adjusting to the current environment. But the adjustment in sterling has assisted a bit.” Regional markets, in which Wolsey mainly operates, are faring better – where there is “local housing for local needs”.

(Pictured) With development funding through Wolsey, Dunedin Homes is at the final stages of construction of 55 houses and apartments at St Annes Road, Willenhall, West Midlands

O’Brien says that since the EU referendum high street lending has continued to constrict, with banks agonising over market demand for schemes and their affordability. “I would say for SMEs it continues to be a tougher environment. That’s where funders like ourselves come in who are comfortable with risks.”

Bank lending has toughened across various sectors since the Brexit result, says Rishi Khosla, ceo and co- founder of OakNorth Bank. Following the referendum, OakNorth reduced its loan-to-value limit from 70% to 50%. “Post-Brexit there was a correction in local markets,” he comments. “With LTVs the value can go down. But we’re offering 75% loan-to-cost on schemes.” OakNorth has managed a range of deals in the past six months including in London and Liverpool. It lends up to £20 million. Over the past two to three years Khosla has noticed a proliferation of bridging companies “which shows a lack of bank finance. But we’re looking to buck that trend.”

(Pictured) "Post-Brexit there was a correction in local markets" – Rishi Khosla, ceo/co-founder, OakNorth

If banks refuse, housebuilders will find a funding partner if they have well-considered plans for desirable homes, “in the places people want to buy them and at prices buyers can afford to pay,” says UTB’s Paul Keay. UTB recently funded a debut scheme by Belfield Developments “where the principals had lots of experience renovating and building homes for clients, and were now ready to be a developer in their own right”. (see pic, pg 49).

And housebuilders will do well to plan homes that are Help to Buy eligible, indicates Wolsey’s Stephen O’Brien. He praises the four-year old equity loan scheme, acknowledging that its planned expiry date is approaching. “There’s strong demand for Help to Buy product. It’s a very good initiative. The government sees housing as an important factor for the economy and social mobility. Unless someone advises otherwise, there’s a case for Help to Buy.

“But the nearer we get to 2021, the more we need clear advice on its future,” he warns. OakNorth also likes Help to Buy-friendly projects.

For the experienced SME, “there has never been a better time [for securing funding] in terms of the range of options, and indeed the number of funders on each funding ‘tier’”, claims John Waddicker, director of Positive Commercial Finance. The only bind is choosing the right option when faced with a variety. “What might appear to be the cheapest option on paper might not prove to be the most appropriate or compatible when works begin.”

Exciting deals
Keith Forster of PF&D is adamant there is ample funding for housebuilders. “For developers that need finance there are exciting deals. As a broker we want to make developers aware of that.” He claims that “a lack of communication” is inhibiting smaller housebuilders’ access to finance. “Developers don’t know where to go. There’s an element of surprise when they discover what’s possible.” Over the past 12 months, funding of up to 90% of land and build costs has become a reality, he says. “We’re doing several deals like that.”

The prospect of Brexit has not troubled PF&D’s clients, Forster says. At the same time, he concedes that overall sentiment could vary according to location. As Housebuilder went to press the prime minister was due to trigger Article 50 – the start of the withdrawal process from the EU. But most lenders spoken to here foresee little market reaction to the move, at least not in the short term. “People have priced in Article 50,” states OakNorth Bank’s Rishi Khosla.

Next 18 – 24 months
“It [Article 50] is a key point of the process but the effects of leaving the EU will become more apparent in the next 18 – 24 months,” Stephen O’Brien points out. “For the next year the market will probably continue the same.”

(Pictured) A Thames Valley developer approached Go Develop with a £4,990,000 project consisting of 14 dwellings. Go Develop purchased the site as freehold, with the scheme completed ahead of time and budget

It is the next “political crisis” that is likely to trigger a wider financial shock, predicts Mark Holden, group md of Go Develop – “where these institutional funders backing the ‘alternative finance’ space turn the funding tap off. An economic event is highly likely to interlink with a political one, and most likely the numerous European elections across so many countries over the next 18 months will be the catalyst, during the crucial two-year negotiating period.”

There is uncertainty ahead. But UTB’s Paul Keay is confident the fundamentals supporting activity and prices in the housing market will remain solid. The importance of more housing cannot be understated, BLG’s Stuart Parfitt infers: “The delivery of affordable housing both in the rental and owner occupier sector is now a political and social imperative.”

(Pictured) “We are working together to boost the impact of SME housebuilders in the market" – Robert Grigg, md of property finance, Hampshire Trust Bank

So, regardless of Brexit or European elections, the need to build more homes seems too strong to disrupt. And specialist lenders are keen to help housebuilders. “We are working together to boost the impact of SME housebuilders in the market,” says Robert Grigg, md of property finance at Hampshire Trust Bank.

He is pleased about the policy emphasis on SMEs and hopes it does bear fruit: “We are looking forward to seeing how this focus materialises into action for the greater good of us all.”

The struggle for finance
The credit crunch and consequent recession “managed to wipe out swathes of small developers,” says a spokesperson for Goldcrest Finance. “Whilst the large corporates are enjoying banking support and the assistance that national schemes such as Help to Buy offer, it remains the small, independent developers who continue to struggle to raise finance for new projects due to banking regulations, strict criteria changes and now, in light of the Brexit position.”

Smaller housebuilders are perceived as higher risk despite potential profits and the overall quality of the deal, Goldcrest comments. “Another challenge for the smaller developer is for those who are looking to develop on small pieces of land. Often there are high costs involved with the reports required during the, still often difficult, planning process, with expensive reports more difficult to absorb on the smaller development sites.”

Goldcrest Finance offers funding from £30,000 to £10 million on projects of up to 50 units. JV-style deals are available offering up to 100% of costs.

The lender predicts “some uncertainty” following the triggering of Article 50, “where some lenders may take stock for a period and review market conditions and scale back on new lending”.

Part exchange performance
Since the autumn, part exchange company the PX Partnership has enjoyed robust trade, with an increase in cases from both new and existing partners.

“When it comes to selling the properties we have acquired we have noticed that viewing to offer ratios have increased, which could be an early indicator that the market is slowing in some areas,” notes senior manager Stephen Shaw.

Part exchange offers numerous benefits throughout the sales cycle, Shaw explains, “starting by increasing footfall to sites as it appeals to those with properties to sell. It also ensures that sales can be agreed quickly and proceed to completion smoothly, removing the danger of chains collapsing and reducing the chances of sale fall-throughs. Part exchange can also be particularly effective at facilitating off plan sales and helping developers predict their cash flow.”

Shaw does not predict any market murmurs following the triggering of Article 50. “Brexit succeeded in taking the heat out of the market but this wasn’t a bad thing given how the market was progressing. In general it didn’t have the widespread negative impact that some experts and analysts had predicted. Until such time specific policies are put into place and the general public begins to directly experience any fallout from these, we do not see this changing.”


BLG www.blgdevelopmentfinance.co.uk 
Go Develop www.go-develop.co.uk 
Goldcrest Finance www.goldcrestfinance.com 
Hampshire Trust Bank www.htb.co.uk 
OakNorth Bank www.oaknorth.com 
Positive Commercial Finance www.positivecommercialfinance.co.uk 
Property Finance and Development www.propertyfinanceanddevelopment.co.uk 
United Trust Bank www.utbank.co.uk 
Wolsey www.wolsey.net

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