After a slow last 12 months in development finance, it appears most attendees were relieved to be entering 2020 with a bit of hope.
As one broker noted: “I felt the enquiries we were getting throughout most of 2019 were desperados left in the marketplace, sort of hung out to dry, looking for equity partners.
“Perhaps they’d overrun on their initial scheme and were in default on their initial debt or such. We certainly felt the quality tailed off last year and virtually dried up.”
Confidence seems to have rebounded since the December General Election, although brokers warned there is a need for caution and there could be a bumpy year ahead.
“We’ve had developers ring us from all round Europe, saying they’re back in the market, back in the game, and ready to invest here,” said one attendee.
“I’m a little bit sceptical about it personally; I just would like to see what happens with our international trade deals and where the pockets of investment are going to come throughout the UK. I think that’s restricted big builders from releasing some of the plots they’ve been hanging on to.”
Another added: “We’ve seen a lot of enquiries that we thought were dead now deciding to go ahead.
“But at the same time, how much of that is the developer saying: ‘I don’t want to miss out on this mini-bubble, I don’t want to miss out on this upward trend of prices, so let’s attack now’?
“How much of that is going to actually translate into completions I don’t know.”
This was echoed by another broker who noted that they had seen developers’ profit margins drop from around 30 per cent in 2017 down to around 15 or 20 per cent now “if they’re lucky”.
With many attendees noting that most of the easiest or best quality permitted development properties now being undertaken, there was uncertainty about where the next source of projects would be.
One suggestion was modular and other modern methods of construction, and if this could work for smaller developers.
There was universal agreement that the wider housing and mortgage industry should be embracing these types of buildings to help alleviate the housing shortage, but it remains tough to finance such projects.
“If the mainstream mortgage market isn’t going to lend on that building and has issues with that particular type, then obviously there’s going to be caution,” noted one attendee.
“If it’s a specialist construction type, it limits the exit route, so therefore the specialist lenders are more reticent to look into it. So we need the mainstream market to be a little bit more flexible in what they’ll lend on.”
Another agreed, adding: “Absolutely, if you’ve got a big bank that’s willing to lend on the finished property, then you’re more comfortable putting the money up to fund the initial development.”
Development or bridge?
With heavy refurbishment products becoming more common, the discussion then moved on to considering where the dividing line between bridging and development finance sits.
Points raised included the importance of monitoring the project by the lender and how it was being financed, but understanding the term and rate limits seemed to bring a general consensus.
Brokers highlighted the concerns where projects may not have met the expected end date, potentially without sufficient support and oversight for a project of that scale.
“There’s a big difference between a bridge and development and I think a lot of lenders have got into the heavy refurbishment space, which is basically a bridge,” said one broker.
“So a lot of clients are chasing rates looking at headlines and then ended-up in the wrong product because they’ve chased the wrong thing.”
Another added: “We’ve certainly seen on the bridging side, especially over the last six-to-nine months, where the sale to exit hasn’t come through, or they’re doing a refurbishment and it’s slowed down a little bit.”
Strong relationships and decision certainty
The conversation then went on to discuss what brokers find the most successful aspects in the development finance sector at present.
Lenders who look to build strong relationships with brokers and their clients were, perhaps unsurprisingly, highlighted as being most appreciated and welcomed by the attendees.
And this included where they have built strong links within the lender to ensure BDMs, credit teams and underwriters are all working on the same basis, which tied-in to certainty of funding.
“There are too many lenders out there of the larger size that something can change, and it needn’t necessarily be anything to do with the deal, it could be because somebody on committee has put their hand up and said I don’t like this,” noted one broker.
Another attendee added: “If it becomes confrontational between relationship directors (RD) and credit, it shouldn’t be that way. The RD should know what credit are thinking before credit have to say it.
“So a lot of the things that come to credit are already agreed pretty much because RDs know what credit teams are thinking – don’t bring deals that they’re not going to do.”
And of course having direct contact with empowered underwriters, rather than just case handlers, is a major positive for brokers.
Universal AML checks
There were a few bugbears raised as well, issues where the industry as a whole could improve to make things smoother throughout the overall process and ensure better and more appropriate outcomes for clients quicker.
One broker called for a consistent approach to anti-money laundering (AML) and know your customer identity verification across the industry.
“You’ve got to have a consistent approach to it across the industry and that’s got to be driven by the regulators,” they said.
“It’s down to the regulators to say this is the package that you need so everyone is singing off the same hymn sheet.”
Others noted that lenders need to improve on the solicitors they use, to ensure they were certain of the specific terms to be operating under and easily contactable when problems arose.
The issues within the bridging market around default penalties and whether lenders were operating ethically by not giving long enough loan terms were also raised.
And finally, for brokers themselves, the issue of regulation continues to loom.
As one concluded: “We’ve just seen the senior managers regime come in, just leave us alone for a couple of years so we can do some business and get things in place.”
Jo Breeden, Crystal Specialist Finance
Kris Corns, Crystal Specialist Finance
Ken Gould, One 77 Mortgages
Dale Jannels, Impact Specialist Finance
Paul Keddy, Mortgages For Business
Joel Kersen, SPF Private Clients
Nick McLean, LDNfinance
Craig Taylor, One 77 Mortgages
Ian Ward, Bespoke Business Finance
Specialist Lending Solutions