The marketplace for UK Property Development Finance is changing; that’s a fact. There is currently a substantial increase in the number of entrants seeking to provide funds, and as a result of increased competition, there has not been a better time since the crash to evaluate the development funding options available to you. We will take a look at the recent changes, and provide insights into what these changes mean to developers as they look to fund future projects. Finally, we will give you the best tip for finding these products, in a timely manner.
4 main changes…
The four main changes that have happened are cash stakes, the availability of London rates elsewhere, the ability to manipulate your own rate down if you know how, and the lack of advertising from some of the newer, more attractive funders resulting in a change in how you find them.
1. Cash Stakes
Depending on the funder, cash stakes are currently going n opposite directions. Let’s get the bad news dealt with first.
High Street Banks require more and more cash in the bank, and can be up to 30% in some cases. The problem the High Street’s have is the large volume of repossessed land and property they are already sat on since the recession of 2008 began. There is very little appetite to risk further defaults as a result, unless the developer negates the bank’s risk but putting a substantial cash element down themselves. Whilst this is comforting for a bank, it clearly does not help developers who cannot find that sort of stake.
Newer, smaller, private funders, who are not saddled with problematic loan books, are able to take a different view on risk. Many can now fund 100% of the build costs, and in some scenarios, cash stakes (or deposits for purchase) can be as low as 10%. This can even be offset against an anticipated uplift in the site, and paid as a cash sum later.
2. Location of the best rates
Most developers have known for some time that the best rates are found inside the M25, but this has now begun to change. Confidence is increasing in other parts of the country, with some recent evidence of 7% rates being offered in parts of the South West. Funders accept there are other areas of high demand outside of London, and finance is beginning to reflect this.
3. How you can manipulate your own Annualised Rate down
An interesting side benefit for developers is the change in interest charging criteria as a result of better competition. There has been a shift from charging interest on the total facility, to charging interest on what has been drawn down to date (i.e. like a credit card). As a result, when you as a developer decide to draw down funds has a major impact on the final rate you will pay. If, for example, you are being charged interest on 20% of your facility at the start instead of the whole facility amount, come the end of the term, the annualised rate will be substantially lower as a result. We demonstrate to clients regularly how an interest rate of 8.4% can become 5.37% with the right facility in place, and equal drawdowns over 9 months of a 12-month term. There are some caveats to this, but each case is different. Much of it, however, depends on your ability to manipulate your draw down requirements.
4. More funders, less visible
An interesting quirk of the current marketplace is that many new funders are not actively advertising. A good number align themselves with good quality introducers, who they pay as part of any arrangement fee. To an extent, this may be a cost effective strategy in the early days, as funders only have to pay for the generation of business if a deal is done. However, this is the way a good number operate in the long-term, so if you want a full evaluation of the market’s options in a timely manner, aligning your business with a non-fee charging broker/introducer is a worthwhile practice.
In conclusion – how do you find the right finance?
It is absolutely possible for many developers to find cheaper, alternative forms of funding, as new entrants seek to establish market share. However, it is not as easy as going to Page 1 of Google to find all the answers. As in any walk of life, a trusted finance partner, with up to date market knowledge, an understanding of the different funding structures in play, and a network of visible and invisible sources, can quickly and effectively provide developers with the funding they need. This is often from sources one would never find, and on terms you would not know you could get.
To find out how we lowered an 8.4% rate to 5.37%, click here..
Author Bio: Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing developers with useful, market-leading financial insights that have a positive impact on their bottom line. As a result, Chris helps Property Developers get the best rates and terms available at any one time.