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