Are there any positives in the development finance sector?

It was hard not to come away from the panel discussion with real estate professionals feeling a little despondent at the current state of our industry. While there were little rays of hope - new exit products and local authority funding - overall it feels like a tale of two halves and fundamental change in the market. 

I’ll share my notes from the 50 minute discussion which will be condensed into 10 minutes and released shortly. These are just based on my notes and recollection so please wait for the full recording for accurate quotes. Panelists I hope I have represented your points accurately. 

On Friday 5 April I was invited to sit on a panel discussion by Development Finance Today along with other property professionals. The panel was led by Development Finance Today editor Beth Fisher and hosted by Ranjeev Kumar in the beautifully designed Watson Farley & Williams offices. 

Panel members were: 

Simon Knowles, Aldermore

Zuhair Mizra, Avamore

Ranjeev Kumar, Watson Farley & Williams

Adele Turton, Sirius Property Finance 

Matthew Cleave, Arc & Co

Graeme Alfille-Cook, Apex Airspace Developments

Beth Fisher, Medianett

And of course me, Nicole Bremner, East Eight

Q. What are the issues causing a slow down in the lending market? 

Zahair: Shrinking margins and pressures on margins are playing a big part. Other issues include lower sales prices as well as longer sales periods. Both of these, in turn, place further downward pressures on valuations. 

Another issue is vendor expectations. They still seem to be basing prices on previous market conditions and while the market has moved on, and down, vendor expectations have not yet shifted. 

Previously with schemes you might factor in a bit of a GDV increase over the term of a development. Now you can’t factor it in and in some cases need to stress test a decline in total GDV. 

Matthew: We’re noticing an increase in fixed costs like materials and labour. 

Me: We’re also noticing cost increases just start to roll into prices now. While we had forward purchased a number of items like kitchens, tiles etc now we’re having to renegotiate on prices which have increased. 

As a developer who has relied on crowdfunding we’re finding investor sentiment has turned somewhat. Investors are more cautious about investing and sometimes not understanding the impact the macro economic conditions are having on individual developments. 

Q: What issues are perhaps halting development?

Graeme: During 2012-17 many developers were building out developments that were purchased at distressed rates following the 2008/9 financial crisis. These sales purchases have now ended and vendor expectations are much higher. 

Apex see huge opportunities in the roof space market. It’s estimated that there are at least 180,000 potential roof space homes just in the capital. 

Simon: Currently it’s just Help To Buy (HTB) which is propping up the market nationwide but especially in London where applicable. 

Nicole: We’re finding that sometimes up to four different loan facilitates are required for a single development which obviously eats into margins - valuation costs, entry/exit costs and potential time delays. 

Graeme: Apex have found success with government funding lines. We’ve secured a 10 year ￡4.5m facility from the GLA. 

Simon: One positive is that sales are coming through as expected in the HTB and first time buyer market. 

Ranjeev: We’re seeing developer clients with business plans that are too aggressive for current market conditions. The length of the planning process is also proving problematic. While there are some great flexible new loan facilities now many developers are still working on old, inflexible loans. 

Adele: We’re having to use the borrower’s base case as the actual case. As a result we’re trying to structure deferred payments to vendors in order to make appraisals stack. 

Matthew: More improvements are needed in the planning process in order to improve margins. This is why it’s important to provide advisory services rather than just brokerage. 

Graeme: The big challenge of housing shortages remain. While developers are up against strong head winds it does help stimulate innovation in what is a traditional industry.  

Me: I believe it’s a tale of two halves. Larger house builders are not facing the same issues SMEs are. Speaking with Tony Pidgley of Berkeley Homes recently he said they’re in a strong position due to their cash reserves and pipeline of developments. Vendors are more inclined to transact with a larger house builder due to brand recognition and trust that the transaction will proceed rather than SMEs. 

Adele: Often planning can take up to three years which is unsustainable for SMEs. Carry costs of the finance are high and not factored in. 

Matthew: It’s just not the lengthy planning process but often the pre-commencement conditions can take 6-12 months. 

Q: Are you changing your exit strategy in light of the challenges? 

Nicole: Yes. Rather than perhaps selling off schemes unit by unit we’re looking at block sales. While it’s efficient and quick, it further impacts margins. With sales taking so long we’re forced to short or long let new builds when individual units fail to sell. The result is that we need new loan facilities in place for the exit or rental period. 

Graeme: I still don’t think we’re seeing signs of stress in the market just yet. It doesn’t feel like it did in 2008/9. 

Simon: We’ve seen a couple of lenders just stop lending completely - even while developers are part way through a project - forcing them to quickly arrange new loans at their expense. 

Nicole: Prior to 2017 we were able to secure cheap high street bank loans at 3.25% plus base. Now this isn’t often available and we need to borrow from other lenders at significantly higher rates. 

Zahair: We always assess the debt yield - net income on debt - to analyse the potential exit to rental and the ability to recover funds. 

Ranjeev: Stress testing needs to be more rigorous. We are seeing more receiver situations which are expensive for everyone. 

Graeme: Homes England are proactive on debt. GLL is also working with a couple of innovative developers such as Pocket Living. Apex has ￡9m available from Homes England and business growth funding of ￡6.2m. Funding is available to those companies who are thinking outside the box. 

Q: Are new loan products available now to meet the challenging market conditions? 

Adele: Developer exit loans saw me through the recession and now they’re increasing again. There’s also an increase in mid-term facilities. 

Matthew: The ideal product is one that allows developers to roll from one facilities to another and ultimately an exit product. 

Zahair: Our finish and exit product from Avamore lent over ￡20m in the initial launch period. 

Matthew: We still believe that developers often forget to market a scheme early enough. The larger house builders have full sales and marketing teams which can start as soon as the concept is finalised while the SMEs have to just fit it in often when the scheme is compete. 

Summary: The panel could have discussed the topics all day. It was hard not to come away feeling a little despondent about the state of the property market. We all agreed that there were pockets of hope - namely more flexible loan facilities that meet the current need of developers and the extension of HTB to prop up the housing market and assist first time buyers - but ultimately we all just need to batten down and wait for the storm to blow over. 

Later as I was reflecting on the discussion I realised we talked for nearly an hour and didn’t once mention the B word…