Lenders ‘getting wise’ to unsuitable permitted development projects – analysis

  • 21/01/2020
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Lenders ‘getting wise’ to unsuitable permitted development projects – analysis
The UK’s permitted development (PD) regime has delivered “a mixed bag” of housing, but widening the rules may not deliver more quality stock, brokers have said.


The comments came in response to a warning from Nick Raynsford, former minster for housing and planning, that evidence of PD’s negative impact in housing “is now overwhelming.” 

Raynsford last week updated his Review of Planning in England, first published in November 2018, with the stark assessment that “the risk of building slums has now become a reality.”

The updated report singled out a PD site in Watford, The Wellstones (pictured, with Raynsford), asking: “Surely we can do better than this in providing new affordable homes in good quality living environments?”

Brokers agreed some PD projects had been of “lesser quality,” particularly during the early days of the regime.

But they added lenders and borrowers had gone through a learning process as to what constitutes a good quality project.

“In specialist lending you do get a mixed bag of clientele, experience and the kind of projects those people will deliver,” said Steve Watts, short term lending and development finance specialist at Brightstar Financial.

“PD gives less experienced developers a bit more opportunity, but obviously the downside is where some inexperienced developers have taken on these projects the level of quality can – not always, but can – lead to a lesser quality finish on the residential assets that are left there.”

However, Watts argued that the sector had learned by experience.

“Inexperienced developers are aware that they are not going to be able to fund massive, multi-million pound projects, and lenders are going to confirm, ‘actually, as a developer you’re not ready for this yet’,” he added. 


Lenders getting wise

Dave Pinnington, director, intermediary relations at Finance 4 Business, outlined how lenders’ had “got wise to people trying to stack ‘em high and sell ‘em cheap.”

“People might try putting apartments with square footage where it’s physically impossible to live in that square footage. Lenders have got wise to that now,” Pinnington said.

“A lot of lenders now say they won’t touch projects over 50 or 60 units, or those below a certain square footage, because they know it’s not ideal living conditions for anybody.

“Just because it’s profitable for a developer doesn’t mean it’s right for the end user,” he added.

Pinnington noted that the collapse of peer-to-peer specialist lender Lendy in July 2019, had “really opened people’s eyes.

“A broker worth their salt would have been a layer of protection, but they were a peer-to-peer lender,” Pinnington continued.

“The high street won’t go near some business and rightly so. The challenger banks are very, very sensible. They have very, very good and solid credit committees that judge each development properly. Often they will send people round to monitor developments on a monthly basis with quantity surveyor reports.

“In development finance a lot of lenders deal with a very limited panel of brokers because they don’t want every Tom, Dick and Harry having access to their money,” he said.

“The problem is with some not-so-well-known lenders that are willing to try making a very profitable return, but without the necessary due diligence,” Pinnington added.


Clients moving on

Westley Richards, founder and director at West Rock Capital, explained how in a previous role he had arranged finance for what was then considered the largest PD scheme in the UK.

The collection of four office blocks, which includes the former headquarters of Sky in Brentwood, Essex, is currently under conversion into 270 studio, one- and two-bedroom apartments.

Richards echoed that lenders have tightened up on which PDs they want to back.

“What we’re seeing, with a lot of lenders at the moment, is they’re not for or against PD but are very much of the opinion that certain of these buildings will lend themselves to residential conversion and others won’t,” he said.

“Meaning that even if you’re able to obtain the consent for PD, that doesn’t mean it’s a project they’ll support.”

He citied buildings with long, dark corridors and those situated in industrial estates as examples of where lenders are likely to think twice.

“In any case,” Richards added, “there aren’t too many building left that are suitable for converting into housing. Clients are moving on to the kinds of premises where it will require full planning consent rather than PDRs.”


Demolition and rebuild proposal

Further, brokers expressed muted enthusiasm for the government’s proposal — floated last October — to extend PD, allowing for two floors be added to existing buildings, and demolition and rebuilding through “permission in principle”.

“There’s every possibility that making knock down and rebuild part of PD is maybe not such a good idea,” said Watts.

“You could get a lot of inexperienced developers knocking down a building and then finding it’s going to be a lot more painstaking to complete the final development than they had planned for,

“It’s a worse case scenario — you don’t want to think of everyone knocking down buildings just because they can — but there will certainly be a few who think themselves more capable than they are,” he added.


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