The inside track on property development. Read our views on borrowing costs, overages, land payments, whether it’s a good time to buy and looking...
The inside track on property development. Read our views on valuation delays, borrowing with outline planning, cash v funding, self-build procurement & hotels.
What’s new with Brickflow?
These reports were designed to bring you news and trends from across our industry, not as a channel to toot our own promotional horn. It seems Brickflow is becoming a more significant part of our industry’s makeup, so please forgive us this time if we start with some news from us.
Brickflow turned one in November and we celebrated by setting some new records for the month. Not least, loan terms were issued to 16 borrowers, totalling £88m in borrowing. Here’s what Development Finance Today had to say.
We think we have a good product, but we aspire to have a great product, one that property developers can’t be without. We know we can make it even better and we’re already working on lots of improvements. (If you do have any suggestions on what you’d like to see next, I’d love to hear from you – firstname.lastname@example.org).
One recent enhancement we’re really excited about is adding detailed criteria for each lender.
Some users told us they had started loan applications historically, then part-way through the process, saw some criteria that perhaps they couldn’t meet. This meant they had to abort the application (and wave goodbye to the time and sometimes fees spent), or make unexpected changes to meet the lender’s requirements.
Neither option is a great experience, so we’ve set out to resolve this issue by publishing the lesser known criteria on Brickflow.
The type of information borrowers will now have access to includes:
- Day 1 LTV cap – a lender that caps day 1 leverage vs a lender that doesn’t, can mean a six figure difference in deposit size
- Deposit and investors – what view does each lender take on borrowing your deposit from investors? Do they want 100% of the deposit to come from the borrowers, or are they potentially happy with 100% from investors? Very useful!
- Experience – how much each lender requires you to have
- Max unit price and max £ per sq foot
- Lenders views on; Air rights, Listed buildings, Modular construction, Permitted development rights, First time developers, Sharia compliant loans
Once you’ve completed a search on Brickflow, each loan option on the results screen now has a ‘Check Eligibility’ button. Click it and you’ll see the criteria guidelines direct from each lender.
One of the biggest problems with getting loans approved at the moment lies with valuations. Whilst the shortage of HGV drivers has been well documented, the shortage of valuers seems to have attracted slightly less attention.
Pre-Covid, we’d expect to see a valuer on site within a few days of instruction, perhaps one week at the most. Now it seems up to two weeks is the norm for the site visit, and up to another two weeks for the report.
Speaking to valuers, it seems this is a momentary problem, caused by a backlog of jobs created by Covid. Whilst this is rarely catastrophic for a development finance application, it can be problematic for a bridging loan.
If you’re under pressure however to complete within a certain timescale; perhaps you’ve purchased at auction or negotiated a great deal on the basis that you can complete quickly, it’s worth being aware of the backlog.
Borrowing with outline planning
Borrowers often ask us if they can borrow with outline planning. The answer to this is absolutely, yes. This comes as a surprise to a lot of developers, as they think they need detailed planning permission before someone will give them a loan.
One of the main benefits of buying a site with outline planning, is that there is still profit in the ground.
When you buy with detailed planning, the site will have broader appeal, so there will be more competition. Unsurprisingly, the owner of such a site is going to be looking for the absolute maximum price. With the current competition for consented sites being so fierce, there’s a good chance you will overpay.
By getting in at the outline planning stage, developers can add value to the site just by taking it from outline to detailed planning consent. This uplift in value can be used to reduce the amount of ‘hard equity’ (cash) that is needed by a lender to complete the funding, or can be banked as additional profit.
Numerous borrowers have secured funding for projects with outline planning through the Brickflow platform. Using the same lender for acquisition and the development phase gives borrowers both the confidence that they will get the development funding they need, once the detailed consent is granted, but also will save some doubling up of fees (such as valuation and legal fees).
Normally, we see borrowers achieving loans of 65% to 75% of the value of a site with outline planning. This is the gross loan amount, so the lender’s interest and fees will be deducted. Leaving a net loan amount of say 60% to 70% (depending on loan term). An interest rate of around 9% for this type of loan is typical.
It usually takes up to 6 months to deal with the reserved matters that will allow the detailed planning consent to be granted, but it can take longer. Therefore, a 9 to 12 month loan term will normally suffice, but there are no penalties for early repayment if you do achieve detailed planning earlier than expected.
Once the detailed planning is approved then conversion to a development loan should be straightforward. Any bridging lender will need to know what land loan is possible on the development finance before they can quote.
You should therefore create a search on Brickflow on the basis that detailed planning has been granted (use the expected build costs and GDV), save the search and we’ll call you, or call us on 020 4525 6764 or email us at email@example.com and we can then provide you with the bridging options.
Cash vs. funding
When developers have the cash to start a project they’re often keen to start, on the assumption they’ll secure funding further down the line. This is something we’ve come across a few times recently.
If you do have the cash to start a development then of course it makes sense to start under your own steam as it reduces borrowing costs. But, if you don’t have enough cash to finish the project, then it’s a bad idea to start before getting your development loan agreed.
The reason for this is simple. Lenders want to be involved from the start as they want their IMS to monitor the project from the outset.
Getting funding when you are part-way through a scheme is a nightmare. For a lender there is a lot of work that has been completed that they can’t check (mainly the foundations), and there will invariably be gaps in paperwork; lack of collateral warranties or the necessary insurances for your construction team.
For a lender to feel comfortable in such a scenario, the legal fees will normally be greater.
The way to approach such a situation would be as follows;
- Determine how much you’ll need to borrow and at what stage of construction you’re likely to need those funds
- Get a lender onboard with your plan
- Appoint a valuer and an IMS from the lenders panel to inspect the site before construction commences
- Involve the IMS at the project milestone prior to the drawdown, so they can complete the necessary reports for the future lender
Just me, myself and I – what is self-build procurement?
With high land prices and upward pressure on build costs, margins are being squeezed like never before for developers. As a result, removing the overhead of a main contractor and managing the trades yourself (known by some as self-build procurement), can be appealing.
Whilst you’ll reduce your costs, you will increase your workload and potentially your risk. However, for an experienced developer or construction professional with a project management background, it is a distinct possibility.
So, what is the lender view on ‘self-build’? The answer (as always) is varied.
Some lenders prefer the security of a main contractor and will not support self-management regardless of experience. From a security perspective, if the project is going wrong it’s much easier for a lender to step in when there is only one main contractor.
The majority of lenders will support self-build where there is previous experience. Then the old adage arises; how do I get experience if no one will lend to me to get the experience of managing my own build?
The more experienced developers will find it easier. If you’ve completed five or more developments, a lender will be much more open to this approach. You may still need to appoint an experienced PM/DM for the lender to be completely satisfied.
For less experienced developers, appointing a PM/DM will be a necessity. You need to be explicit with your intentions and seek the lender’s view. Lenders will help guide you on what might be acceptable to them, so have the conversation upfront. Our online Project Appraisal that is sent to lenders has an area to detail your procurement method.
Our friends at C-Link have built a platform that helps borrowers manage the procurement process. They’ve completed the due diligence on all the different trades and allow you to tender each package – check them out here.
Hotels are back on the menu
I am pleased to say that the appetite for lending on hotel developments has come back, which is a trend we’re seeing mirrored across other commercial sectors as well (offices included). It’s been an exceptionally hard time for hotel developers, with the market all but freezing last year and part of this year, due of course to the pandemic.
Generally speaking hotel developments are up to two years or more in the making, so lenders can take the view that in two years time, things will be different again (hopefully good different!).
Pre-lets or pre-sales are needed. Borrowing against a hotel development with a management contract will be hard/impossible, but a lease from an established brand will work. Lenders and valuers will be assessing the covenant strength, and yields aren’t as tight as they were, so expect some value differential compared to pre-pandemic levels.
Owner operated models will also be more difficult to fund, unless you have a well-established brand and/or a track record in this field.
Most lenders are happy to work with developers to help reduce nasty surprises. Allowing you to speak to their valuers before you get too far into the process is a must.
If you do have any funding requirements for hotels or other commercial property, then we’d love to hear from you – please do get in touch on 020 4525 6764 or firstname.lastname@example.org