Banks still playing it safe with development funding

by: Christine Toner
  • 11/05/2017
  • 0
Banks still playing it safe with development funding
High street banks still don’t have a significant appetite for development funding despite an increase in the number of lenders entering the sector, experts have claimed.

In recent months, a number of big name lenders have  announced development finance deals. Natwest recently revealed plans to fund a £28m apartment development at MediaCityUK while Paragon last month completed its first development project in Catford, south east London. At the same time it appointed a relationship director for development finance for the North of England.

However, key players in the sector say on the whole lenders are still ‘reticent’ about development finance.

“I think banks will always be reticent in their development finance activity,” says Ashley Ilsen, head of lending at Regentsmead. “The pricing may be keen but ultimately anyone approaching them has a mammoth task dealing with the set requirements, paperwork or having a genuine decision maker to speak directly with.”

Ilsen said some developers are completely cost driven on their borrowings and happy to wait several months to find out if they have had their funding agreed. For SME developers, however, it is not a viable option particularly if they don’t have a track record with any one bank.

“My concern is that the gap left by the banks is being filled by inexperienced lenders”

As a result, Ilsen says he does not see high street lenders encroaching on the alternative finance space, traditionally the go-to funders for small developers.

“They are disparate offerings and whilst we can’t compete with their cost of funding, banks can’t compete with our specialist knowledge, speed and genuine relationship building,” said Ilsen. “If we are going to make a dent in the current housing crisis we need a significant increase in appetite and flexibility from banks as they are an essential part of the SME finance offerings in the market.”

He added: “My concern is that the gap left by the banks is being filled by inexperienced lenders that don’t necessarily understand the nuances of development funding and the disastrous results of this have already started to come out.”

Mark Harris, chief executive of SPF Private Clients, said while development funding has become more readily available over the past 12 months, lenders favour schemes with unit prices below £1m, while some require unit prices at less than £600,000.

“All lenders require the developer to have a proven track record and to make an equity contribution,” he added.

“Conventional lenders will generally lend up to 55% of the gross development value (GDV), capped at 65% of total cost, while the mid-range lender will go up to 65% of GDV, capped at 75 to 80% of total cost. The stretch lenders will consider 70 to 75% of GDV capped at 90% of total cost. Large single units are not popular among lenders.”

Taking a holistic view

Chris Treadwell, head of Enness Development, said: “The ‘holistic view’ niche lenders take to development finance gives them the edge over high street names.

We are seeing more niche lenders entering the market, tending to operate with a more flexible approach, and usually a quicker process,” he said. “My experience of these niche lenders is that they take a more holistic view of a client’s situation, and don’t always need the three years track record required by the high street. They also often have their credit department in house, which makes the whole process a lot more efficient. Although they offer higher gearing, they do tend to be more expensive, though, so the ‘speed versus rates’ debate really comes into play.”

Treadwell said there was already appetite from the big banks to fund developments, but he believes the market will continue to see niche lenders and alternative finance options coming to the fore.

He added: “The high street, niche lenders and alternative finance platforms offer something different, so each has its place in the market and increased options means increased competition, which can’t be a bad thing for the market.”

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