Property Development Finanace UK Market Report - December 2010

As the end of 2010 approaches it is worth reflecting on the changes we have seen in the funding market this year. The answer is probably "very little"!

The high street banks have hardly any appetite for property lending, especially development finance for new borrowers. At CD Property Finance we continue to see cases where RBS/NatWest have terminated funding on schemes where all logic dictates that they should continue lending to maximise their chances of being repaid. Unfortunately, they are displaying little commonsense and this has resulted in many developers losing all the funds they put into the scheme. Meanwhile, the development is part built and blighted for the foreseeable future.

On a brighter note, we are working with a dozen or so active development lenders plus numerous bridging funders and a handful of good mezzanine funders. This gives a reasonable choice for developers, but it is still hard to satisfy lenders' strict criteria. The smaller lenders have been particularly supportive over the past 12 months. We even managed to secure funding for a small developer in a seaside town to create two flats on top of an existing apartment block, the funder providing a 50% LTV facility with rolled up interest.

Blended Senior Debt and Mezzanine Funding

Working with a single bank this is an attractive option for the experienced developer. The bank provides up to 55% LTV to GDV on normal bank debt terms with up to a further 10% of GDV attracting an enhanced return of typically 20% to 25% per annum. This type of deal is available for well located developments in areas where there is an excellent demand for the product. Typically, appraisals for such schemes need to show a return on total costs of 25% or more.

Finally …

In our blogs we try to provide practical advice to our clients. For instance, earlier this year we advised developers to think very carefully which law firm to instruct on their site purchases and funding of the scheme.
In recent months we have noticed that some developers are making direct contact with a number of lenders and instructing more than one broker in regard to their funding requirements for a particular deal. This is understandable in many ways especially with the internet at everyone's disposal. The developer naturally wants to feel he is getting the best deal.

However the market for development finance is small and there are relatively few experienced brokers and willing lenders. This means that it is more often than not counter productive to put the scheme to more than one source at a time since lenders take a dim view if they see the same deal from a number of different sources. They term it as "touting" or "punting" and invariably the fact that a number of parties are looking at the deal raises the suspicion that the proposal is a "difficult" one. From our experience when this happens that deal tends to go to the bottom of the pile, and stay there.

If you would like more information please call or email us chris@cdpropertyfinance.com

Best wishes

Chris Dowdeswell
01428 684452

chris@cdpropertyfinance.com

www.cdpropertyfinance.com

Bridging and Short Term Finance for Property Development

It will not have escaped the notice of developers and investors that there are still considerable difficulties with raising finance for property deals. The reasons are well known - the banks have neither the funds available to lend to the sector nor much desire to help.

However, in recent months it has become clear that there is a group of lenders with considerable financial resources which are available to help property developers and investors. These bridging lenders, or to use a better description, short term lenders are often backed by large funds using investor money and they are making a real impact on the market.

EXAMPLES OF USES FOR SHORT TERM FINANCE

Auction purchases - up to 70% of value.

Property acquisition where time is of the essence - up to 70% of value.

Refurbishments and conversions - on acquisition up to 70% is available.

Site acquisition - where you have a completed unsold site but are committed to buy another - finance of up to 70% can be secured on both properties.

Commercial and semi commercial purchases - up to 70% LTV.

2nd Charges - for completion of developments.


These are just a very few examples of how bridging and short term finance can help you.

Loans can be non status. Finance is available for up to 12 months and funds are made available very quickly.

We shall soon be enhancing our website with case studies and lending terms for bridging and short term finance so please look out for that but do call us if you wish to discuss how we can help you with this valuable source of funding.

Development Finance Lender Update

Arguably the most serious problem in the market at present is the depressed level of mortgage lending. There are few signs of this improving and, if anything, the shortage could get worse as the FSA considers imposing tighter rules on the lenders that could spell the end of interest only mortgages.

Notwithstanding this, we continue to seek out the best deals for our clients and to locate new funding sources. In this Blog we look at:

- Two new development lenders

- Development Finance in Scotland and the North of England

Bank Finance for Developers

This bank is keen to lend on viable schemes. An exciting feature is that they will allow the developer to "drip" in their contribution to the construction costs provided the bank is happy that future cash flows are likely to be generate sufficient income to fund the developer's share of the construction costs. This means they can in some circumstances lend up to 60% of land value. Their terms are:

• They lend to UK based co's, individuals and partnerships.

• Houses, flats, mixed use - England only.

• Minimum loan £500,000. Maximum loan £3,000,000.

• Interest rate - 8% p.a minimum - can be rolled up or serviced.

• Arrangement fee 1%,

• Exit fee 2% of loan.

• Loan To Cost- 60% of land; 60% of build.

New Small Development Lender

To add to our growing list of lenders we have sourced one that works on competitive terms based on a maximum loan of 55% to Gross Development Value. Terms are normally:

1% arrangement fee

Interest is currently around 7% to 7.50%

There is an exit fee of 1% to 1.50% of GDV

London and Home Counties only.

Development Finance in Scotland and the north of England

We are very aware that locating funding for development is probably harder here than in the south of England. However, amongst our lenders we have one that is happy to look at schemes for houses and flats in Scotland. They will lend up to £500,000 per development to a maximum of 60% of GDV.

Another lender will finance housing schemes for experienced developers in areas in the north of England where there is a strong demand to the value of £1,250,000 up to a maximum LTV of 70% (this LTV includes rolled up interest).

If you would like more information please call or email us chris@cdpropertyfinance.com

Development Finance Case Study 2010

West Sussex - £500,000 residential development finance for 4 new build houses through high street bank. Client had owned the land for some years. CD Property Finance arranged 100% finance to build the houses which should sell for £250,000 each.

Surrey - £150,000 loan to finance conversion and new build of 2 flats. Client had good construction experience but no development experience. The lender completed the loan quickly as work had started on site. The flats will sell for a total of £440,000. The lender required insurance for this project and CD Property Finance was able to introduce its insurance broker to the client, resulting in the insurances being in place in time for drawdown.

If you would like any more details or advice regarding property development finance, please contact us on chris@cdpropertyfinance.com
www.cdpropertyfinance.com.

DEVELOPMENT FINANCE MARKET REPORT

Following the long break we have plenty of news to share with you...

If we are to believe the media and some commentators, the coming months are going to prove difficult for the residential property market. A lack of mortgage availability is still a serious stumbling block despite continuing low interest rates. Another cloud on the horizon for both developers and house buyers is the new rules governing banks' capital requirements. The greater amount of capital the banks have to hold, the less they can lend. This could be another blow to developers and property entrepreneurs who are already being squeezed by the banks.

SPECIALIST LENDERS

The private, non bank lenders are largely unaffected by capital requirements and they have stepped in to the shoes of the high street banks who have virtually stopped lending to small property developers. These specialist lenders have a far greater understanding of development than the average bank. For this reason alone they can be recommended. They also have quick decision making processes which is refreshing given the months that many deals now take to complete through the big banks. Interest rates typically start at 1% per month and most funders are willing to lend up to 50% of Gross Development Value.

One small bank has made a promising debut, lending to SME developers. Of particular benefit is that they allow the developer to provide their contribution to building costs "on the drip". They lend 60% of land and 60% of building costs provided you can show that you have future cash flows that will be sufficient to make your 40% contribution to the building costs. The effect of this is to give you a higher LTV on the land loan.

We have a number of such lenders through whom we can source development finance, and we would be pleased to introduce your scheme to them.

SOLICITORS

It is tough enough to achieve a development finance loan offer these days but the pain can be further exacerbated by long delays in completing development loans. At CD Property Finance we have experienced this on a number of occasions. A period of 6 months to complete a loan is unusual but not unheard of.

One of the main causes of delay can be the lack of experience of the borrower's solicitor. It is imperative that any serious developer should instruct a lawyer who has considerable experience of the complexities of development funding. For this reason, unless your solicitor is highly competent in all aspects of property transactions we recommend that you seek the advice of CD Property Finance on who should act for you. We may well suggest using one of the lending bank's panel solicitors since they will be fully conversant with the lender's requirements. We can assure you that this will go a long way to avoid you losing the development opportunity and can in the long run save on legal costs.

Please feel free to discuss this with us.

PROPERTY INSURANCE, INCLUDING CONTRACTORS' ALL RISKS COVER

All property lenders insist on Contractors' All Risks cover for your project in addition to your compulsory insurances If you do not already have adequate insurance then, again, this can be the cause of long delays in loan completions.

CD Property Finance is happy to help you with all your general insurance requirements through our close relationship with one of the country's leading insurance brokers. Our experience is that they provide an excellent service and can place the most difficult risks, for example, where a project has already been started but no insurance is held.

LTD COMPANY BUY TO LET

We can arrange Ltd Company Buy to Let finance for both houses and flats. Maximum LTV is 75% for houses and 50% for flats. Rates start at 4.24% per annum.

Please contact us for more details.

Email: Chris@cdpropertyfinance.com

web: www.cdpropertyfiance.com

Summer Property Development Finance Update

It's been a busy time in the property finance world in the past few weeks, but there is a distinct imbalance in the market. Prime commercial and residential property are still selling well and funding is available for investments and for development in these areas. However, the secondary market in both sectors is struggling because of a lack of lenders willing to finance any property project carrying what they perceive to be undue risk. In the case of commercial property this may be because the property is let on short leases or where there are break clauses. For residential, there could be a multitude of reasons ranging from location to property type. Flats/apartments are still not popular even with the most active lenders.

As you will see below, we are finding that RBS Group is shying away from any new property projects presented to them for clients new to the bank and is reluctant to help existing borrowers. However, other banks are beginning to step in, cautiously.

I am also pleased to announce our tie up with one of Europe's largest independent commercial insurance brokers. They have the resources to help you make considerable savings on your property and related insurances.

DEVELOPMENT FUNDING

As you may know, CD Property Finance specialises in arranging residential development finance for its clients. Many of you will have facilities with the RBS Group and may be finding that they are reluctant to lend. RBS have generally been very supportive of developers in the past and we have an excellent relationship with the bank but unfortunately they now have to reduce their substantial property loan book. This means that they are very unlikely to take on new clients. For existing clients the picture is not good either and we are already seeing many enquiries from good borrowers who are being told by the bank that they must either reduce or repay borrowings.

We are here to help you. We have long established relationships with all the key lenders and direct lines into their property finance teams. This enables us to solve clients' funding problems. We do not pretend that development finance is freely available but if your scheme meets certain criteria we can probably help. Remember, housing is favoured and the bank will always want to provide enough finance to cover 100% of construction costs and interest. This often means that little can be advanced to buy the land so please bear this in mind.

If you have a project and it needs financing please do contact us.

GENERAL INSURANCE

Our new partner can arrange insurances for

Property Developers - Contractors' All Risks cover; buildings cover; liability insurance

Property owners and investors - Buildings cover; liability insurance.

Here is one example of a current offer:

Our insurance partner is offering great terms to SMEs that meet standard underwriting criteria and have been in business for 3 years or more and have had no claims for 3 years.

For businesses that meet these criteria, and are eligible for their Retailers & Office Policies they will give you a quote of 5% less than your current insurer’s premium.

We will soon have offers for discounted insurance for property developers and will advise you immediately of them. However, if your renewal is due shortly let us know and we will arrange for a quote.

Investment Opportunity

We are constantly looking at ways to help our property development clients, and to provide opportunities for our introducers.

For property development clients we are actively looking to bring investors to your schemes.

If you are an introducer, you and your clients are probably tired of achieving poor returns on money invested. In property development there are opportunities for sophisticated investors and high net worth individuals to achieve enhanced returns.

By way of background, by 2007 it became common for banks to lend up to 85% of the costs of a development project. Since the banking crisis there are not only far fewer property lenders, but those banks that are still lending have amended their criteria and now limit their lending to 60% to 70% of development costs. This means that there is a huge funding gap for most development schemes. This funding gap can be filled by investors.

CD Property Finance offers opportunities for investment funds, companies and high net worth individuals to invest in property projects.

Our property developer clients have the experience to identify profitable sites and CD Property Finance can arrange the development finance form the banks for such projects. However, it is often the case that schemes need some investor finance to ensure that it is adequately funded.

EQUITY FINANCE

We are always looking for equity partners for our clients. Projects to be funded include family housing developments, refurbishments, barn conversions and apartment schemes.

We can arrange development finance from a bank to around 70% of cost and equity partners are sought for the 30% balance of costs. The profits from the completed development are normally spilt on a 50/50 basis between the developer and the investor. The scheme can either be financed through a new company or the main development company, with an agreement setting out the joint venture terms.

MEZZANINE FINANCE
Often the developer client has some capital to put towards the project cost, but not enough to satisfy the bank's requirements. Typically a bank will lend 70% of costs and the gap can be financed, for instance 15% by the developer and 15% by a mezzanine lender.

If you are interested in becoming an investor or require finance, please contact Chris at CD Property Finance on 01428 684452.

CD Property Finance in this months edition of Housebuilder Magazine

Extracts from Housebuilder magazine 'Lending a Hand' - March 2010

Few involved in the funding game expect a wholesale return to the residential market from the big institutions in the short-term. Chris Dowdeswell, principal of CD Property Finance, another brokerage specialising in residential funding, says: “2010 is unlikely to see the high street banks returning to property development lending in any significant way. This is because the banks have extremely high property lending exposures and development finance is regarded as very high risk.”

“The lenders currently prefer family housing schemes, in traditionally popular areas, as opposed to apartments. Over the past 12 months, [we’ve] arranged funding for over a dozen such schemes with a variety of lenders,” says Dowdeswell.

With apartment projects, the lending criteria is, however, far more stringent to reduce risk. Chris Dowdeswell explains: “It’s possible to finance apartment schemes of up to about ten units but whereas bank finance of up to 60% of gross development value is available for houses, only 50% of GDV is available for apartments.”

What most developers want to know, apart from whether the housing market will recover is also whether the funding market will get easier going forward and Chris Dowdeswell is reasonably positive: “I would expect to see one or two more lenders gradually dip their toes back in the water towards the end of 2010 provided property sales and values hold steady during the year.” For most in the industry, that is a reasonable ambition.

For more information please contact Chris on chris@cdpropertyfinance.com
http://www.cdpropertyfinance.com/