Over the past year the property market as we all know has been red hot, with booming demand and soaring property prices.
But, as we are now seeing, the winds of change are here - for now, at least.
While property prices are still rising, predictions of a slump are becoming more commonplace due to a potent combination of rising interest rates, plunging consumer confidence, and runaway inflation.
We may see a drop in prices, particularly in areas with a large amount of stock on, or coming to market. Although this is by no means guaranteed, it is logical that we will also see cautious valuers reacting to nervous lenders resulting in many instances in lower GDVs - in the short term at least, leaving many developers in a difficult position.
That, in turn, will make the UK property market less attractive to investors, particularly those based overseas. When you consider a lot of funding for short-term finance originates abroad, that becomes a problem.
In this scenario, we may see lenders will tighten their criteria and, developers, especially those with less experience might find their funding options thinning in the short-to-medium term.
An extremely gloomy picture I here you cry! Is there any good new?
The answer is yes! There are things that you, as a developer, can do to bolster your own position and make yourself more attractive and credit-worthy in the eyes of a lender.
Focus on your costs
A combination of Brexit, Coronavirus and the Ukrainian war has resulted in a sharp spike in the cost of materials and labour. Clearly that’s a problem.
But for many developers who have a good grasp on their local suppliers and resources this may already be mitigated.
HOWEVER, in the main lenders are unlikely to take your word for it and will insist on industry ‘best practice’ cost to build figures = currently circa £200-£220+ psf
‘That’s ridiculous’ I can hear many of you say, however understanding how any particular lender (and they are all different) will view your costs is imperative to getting that lender on board.
Yes, keeping your project costs down is important as is of course not over-paying for the land. But, fundamental is that before you approach any lender, work with a good broker to go through all your costs and make sure that they will stack up for the lender not just generate you maximum profit.
Capitalise on ‘Green Initiatives’
The government is pushing to make the UK’s housing market greener, with landlords mandated to make their properties more efficient from 2025.
Hanging on the coat-tails of this Greener wave are an increasing number of lenders offering discounted product when a developer can clearly show energy efficiency mainly through A, B or even C EPC ratings at the end of build
Focus here can not only help get lenders on board but lead to highly advantageous rates in an increasingly difficult market
Pick the right lender
Lender competition is strong in this sector of the market, giving developers plenty of options when they come to raise finance.
However, it is perhaps now more imperative than ever to partner with an established and respected finance provider that has heightened degrees of funding certainty.
Some lenders may have less secure funding sources that have the potential to either pause or evaporate under difficult market conditions.
It goes without saying, but the last thing any developer wants is volatility in their cashflow. As such, it pays dividends to do your homework when choosing a funding partner.
That’s where an experienced broker comes in handy. Not only will they be able to help you navigate lenders’ requirements, but they will also have insight into which have the soundest funding arrangements.
Investigate alternative or supplementary funding
While senior lenders will be your first port of call when it comes to raising finance, it is worth looking around to see what supplementary funding sources might be available.
There is an array of local and central government funding available to cover development or infrastructure costs which you may be eligible for.
Although it is likely their criteria will be tightened, finding yourself a strong equity partner and/or mezzanine finance provider may become key when gaps need to be plugged.
Use a good broker
Well we would say that wouldn't we... But the importance of working with a competent specialist finance professional cannot be over-stated.
A good broker will
visit your site and take as much time as is needed to understand you as a developer and the usps of your scheme
Help rework your figures (if that will help secure funding)
Understand the specialist development finance market inside out
talk only to relevant lenders and rarely more than 3 or 4.
They will package your scheme up fully before sending information out to lenders
Work with you, your legal team and the lender through the entire legal due diligence process
Stay in contact throughout the build, helping with any further challenges that the lender through up well after the facility is in place
And fundamentally they will challenge you if what they believe you may be doing or saying in relation to finance will hinder your chances of getting it…
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