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UTB Guide to Property Finance
Welcome to the Bridging & Commercial Magazine guide to property finance, in association with United Trust Bank
Contents 4-7 8-11 12-15
Giving developers the edge Utilising bridging to acquire and fund refurbishment projects Case studies
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UTB Guide to Property Finance
GIVING DEVELOPERS THE EDGE By Gavin Diamond, Director - Bridging
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UTB Guide to Property Finance
Bridging has gained a reputation as being a jack of all property funding solutions and today’s property professionals are employing it in a variety of scenarios to seize opportunities and build their businesses. Although the speed and flexibility of bridging makes it suitable for a wide range of customers, from downsizing retirees to trusts and companies refinancing complex portfolios, its use in the property development and improvement sector has grown rapidly in the last few years. With competition currently rife to secure properties suitable for redevelopment, having access to funds quickly can give switched-on developers a competitive edge.
passport or driving license on their mobile phone and have their identity verified through facial recognition in minutes. If the customer chooses dual legal representation, a time and money saver in many transactions, the app enables us to ‘passport’ details to the solicitor, making things even simpler and quicker.
United Trust Bank (UTB) was one of the first lenders to spot the opportunity to offer bridging loans as a solution to acquire and fund property improvement projects and it has become a significant stream of business from long established customers and those new to the product and us. Over the last few years, we have refined the product and enhanced our service with considerable investment in fintech and streamlined processing. Although the restrictions presented by the Covid-19 lockdowns undoubtedly accelerated the implementation of some of these improvements, I believe we were ahead of the curve and had already become adept at assessing and agreeing proposals swiftly. Our most recent innovation, Fast-Track, enables us to issue offers on more straightforward cases within a day or so, sometimes hours. This is particularly relevant for auction purchases or time-sensitive transactions. Launched earlier this year, the service has been extremely well received.
Bridging’s flexibility can be important at the end of the project as well as the start. There may be several possible exits, and these may be adapted during the term if the customer’s circumstances change. For some, the exit will be from the proceeds of the sale of the improved property, for others—who intend to improve and then retain some or all of the properties for their portfolio—the exit may be a combination of a sale and/or refinance on to a BTL or other investment loan. One client had intended to sell the two apartments he’d created from redundant office space above a bank but mid project he rethought his plans and instead arranged to let them for a while. When his initial facility came to an end, UTB was able to provide the borrower with a medium-term facility to accommodate his change of plan.
Some of the digital enhancements we had introduced prior to Covid were crucial to enabling us to keep lending throughout the pandemic. For example, our industry leading app removed the need for face-toface meetings to fulfil KYC requirements and sign documents. It offers biometric identification and verification, and simplified admin. Clients can upload a picture of their
Bridging transactions have differing degrees of complexity. We utilise automated valuation models (AVMs), whenever relevant, to reduce costs for customers and keep deals moving quickly. However, we also maintain a national valuer panel and employ the services of third parties such as professional asset managers for transactions requiring a more detailed analysis, like projects involving significant structural or complex conversion or refurbishment works.
For many projects, property developers choose to use the bridging route over traditional development finance because of the size of the loan, the flexibility of the product, the range of securities that can be considered, the speed at which it can be obtained, and the attractive relative cost. As a specialist property lending bank with strong development finance, structured finance and bridging finance teams, between us we can find solutions to suit most developer clients, whatever the type and scale of project they have in mind. 5
UTB Guide to Property Finance
Customer Case Study Bruce Burkitt www.propertyexperts.co.uk Bruce Burkitt, founder and managing director of Property Experts, has developed over 700 units and become a regular customer of UTB’s Bridging Division. On this occasion, Mr Burkitt had identified a detached, threestorey house in South Croydon with potential to convert to seven self-contained flats. Once completed, the flats would be let and added to his company’s growing BTL portfolio. The house was previously used as a children’s home and the improvement works required were extensive. As well as internal remodelling, Mr Burkitt planned to excavate the basement and add a single storey extension to the rear. He had obtained permission to convert the house prior to committing to the purchase. Having recently completed a similar scheme on an adjacent property, he was well prepared for any foreseeable complications and knew what was needed to deliver another successful project. Mr Burkitt contacted broker Bruno Welch of Commercial Finance Practice who in turn approached United Trust Bank to provide the circa £1.8m required to cover the purchase price, cost of works and other fees, costs and interest for the 12-month facility. As a valued UTB customer and someone Gavin Diamond, UTB’s Director of Bridging Finance, has known for many years, the Bank was keen to support his latest project. By providing UTB with a charge over three unencumbered properties within his portfolio in addition to the Croydon house, Mr Burkitt was able to keep his cash requirements to a minimum. The proceeds of the loan facility provided him with a day one amount to buy the property and then fund 100% of the total cost of works in tranches, amounting to an overall loan facility of 66% of GDV. The works were estimated to take eight to nine months with the completed flats valued at around £2.5m. Bruce Burkitt commented: “The speed of arranging bridging, especially with a specialist like UTB, is really important. It’s a competitive market and there’s always interest in sites and properties with development potential. When I see an opportunity, I must be able to seize it quickly. “Specialist banks like UTB are setting a pace the high street just can’t keep up with. They’re the disruptors in the sector, introducing intelligent products and services which cater for people like me.”
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UTB Guide to Property Finance
ROUNDTABLE DISCUSSION: utilising bridging to acquire and fund refurbishment projects
On 22nd April, Bridging & Commercial partnered with United Trust Bank (UTB) for the latest instalment in the Medianett virtual roundtable series — this time on the topic of utilising bridging to acquire and fund refurbishment projects. Hosted by Medianett’s managing director, Caron Schreuder, alongside UTB’s key account managers Paul Delmonte and Owen Bentley, and underwriting manager Becky Kidby, the discussion also benefited from the expertise of several brokers, namely Samantha Pettit, business development manager at Crystal Specialist Finance; Bruno Welch, managing director and mortgage consultant at Clayton-Welch Associates; and Chris Oatway, owner and director at LDNfinance. During a brief overview of the current market, Owen identified strong appetite from investors to purchase at auction to ‘tart and turn’, and then sell or add these properties into their wider BTL portfolios. “Bridging has always been a dynamic vehicle that supports that.” Paul highlighted that clients are increasingly looking for ways to make their money work harder for them. “People aren’t getting the return for their money that the banks used to give . . . so they’re exploring other opportunities 8
to really make use of that money.” He suggested that this has led to borrowers considering further ways to generate profit based on the entire site, rather than just the property, such as the potential being realised by ex-pubs turned into flats or HMOs. Becky reported more refurbishment enquiries coming across her desk, of both the light and heavy variety, and an uptick in properties bought at auction. “Some of the permitted development changes that have come in [mean that] we’re seeing people looking at more unusual properties that may have had commercial use previously, and they’re now considering the opportunity to convert that into some kind of residential accommodation.” Coming on to bridging’s suitability for this type of deal, the group concurred that short-term finance can now achieve so much more than in previous years, and its flexibility has evolved. Samantha believes that the product has become more widely known among brokers and they are wanting to get more involved and educated in the space.
UTB Guide to Property Finance “[For] mainstream brokers who are used to dealing with vanilla product types, bridging is becoming more understandable to them.”
Bruno commented that, if you can fund the project pre-planning, then you can take advantage of the uplift in value.
Over the past few years, Chris has witnessed numerous providers enter the arena (and, subsequently, refurb), making a broker’s role even more crucial.
Bridging’s flexibility is designed to help the client get from A to B and can help with a variety of stages within that sometimes “bumpy” journey, including the planning phase, Owen remarked.
“There is a full range [of options available], but you need to know which lenders are good for that specific deal you are looking for.”
Although refurbishment may seem a far cry from a full-blown development project, experience still matters, and some form of a track record is favoured.
Although he feels that bridging lenders have come a long way, he thinks that there is still room for lenders to respond to movements in the process and adapt their products accordingly in order to “keep up with the market”. “With all the rule changes and planning laws that have come in, it’s becoming more complex. Where refurbishment turns into development finance, it is becoming a bit of a grey area.” Traditionally somewhat of a ‘one-time product’, utilising bridging for refurbishment purposes “opens up the door” for clients to become repeat borrowers, Becky stated. For UTB, a loan facility extending to 18 months factors in sufficient time to obtain planning permission where relevant, undertake works, and then sell or refinance to repay the loan. Up to 100% of works costs can be provided within an overall facility limit of 70% LTGDV. Additional security can also be used to release even more money if needed. According to Becky, this represents “real flexibility” when compared to the lower thresholds commonly available via mainstream banks. When asked about UTB’s stance on cases that are without planning or at the pre-planning stage, Becky acknowledged that projects with the green light allowed for a more accurate valuation, however, subject to the likelihood of that application being successful and the experience of the borrower, UTB will consider these, particularly when funding a purchase or providing an equity release. “Just because the planning isn’t in place, it doesn’t mean it’s a closed door,” Paul added, with Owen noting that transferable experience can also count in an applicant’s favour.
“[For] someone going to an auction [for the first time], not really knowing what they’re doing, nor the cost of works; if they’re going to retain it and rent it out, what the potential value is; and how the BTL market works off the back of it,” Owen said, “it’s imperative that you’ve got a bit of grounding and that you speak with professionals to help guide you through it.” When asked about the need for investors and brokers to understand the refinance market, Bruno stated that the exit strategy of any bridging product was “vital”. You don’t want to get stuck on a bridge, as that can potentially be economically horrendous.” Samantha relayed that refurb-to-let is “coming into its element”, with a surge in enquiries from brokers. “They want that extra bit of confidence” she said, pointing out the benefits of underwriting once and ensuring the exit for when the client is ready. Chris outlined the differences between the light (typically a paint job or kitchen/bathroom remodel) and heavy refurb categories. “The moment you start moving walls around, it starts shifting out of light refurbishment and into medium or heavy.” He added that, when doing extensions — sometimes called light development — a bridging lender may still be able to help, as the planning process might be simple, especially if it falls into PD. When the loan amount becomes a much larger percentage of the development part of the facility, rather than the acquisition, then it tends to be classified as a development. While a QS is unlikely to be required for a refurb project, “the moment things start getting more technical and you need to bring in different professionals around you, then the monitoring becomes incredibly important,” said Chris. 9
UTB Guide to Property Finance
Post-event, Gavin Diamond answers some of the audience questions that we didn’t have time to cover during the session Q: Please provide an overview of UTB’s criteria for its refurb products A: We cater for light refurbishments (e.g. new kitchens, bathrooms, flooring etc) on our standard bridging product with rates from 0.48% pm with LTVs up to 75% of current value. For heavy refurbishment (e.g. projects involving structural changes to the property, requiring planning permission or building control sign-off) rates are 0.75% pm with a day one advance of up to 70% LTV (net of loan fees) of current value, with 100% of works costs funded in stage payments in arrears, subject to a maximum facility (including day one advance, loan fees, works costs and interest) of 70% of GDV. We are able to lend on properties in England, Wales and some parts of Scotland. Q: How you deal with clients who have little refurb experience? What is more important: the borrower’s experience, or that of the team around them? A: For light refurbishments, we don’t require the client to have any specific previous experience. For heavy refurbishments, we would usually require the borrower to have experience of two similar previous projects. In the absence of experience, we would still consider lending if the level of complexity of the works is not considered significant or we are able to mitigate the risk by, for example, the client putting a greater amount of their own money into
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the transaction (i.e. lower initial LTV or LTGDV) or the client having a good level of net assets in the background. We would always expect the team around the borrower to have the appropriate skills to carry out the project. Q: Exit strategies in the present environment – what is acceptable? A: Our consideration of exit strategy has not changed. Any exit strategy that is plausible and can be reasonably demonstrated is acceptable. Usually this involves a sale and/or refinance of the subject property, or other properties owned by the client. Q: What are the differences in fee structure for heavy and light refurb? There is no material difference in fees between heavy and light refurb and we don’t charge exit fees on any of our facilities. For heavy refurbishments involving stage drawdowns of works costs, an asset manager will visit the property ahead of each drawdown to provide a progress report. A fee of £500 is charged to cover the cost of each asset manager visit. Q: What is the maximum number of units acceptable in a block for refurb? A: There is no maximum number of units. Guideline parameters are a maximum cost of works under a refurbishment facility of £500k, subject to this being a maximum of 50% of the current value of the property, but proposals falling outside of these parameters can be considered on a case-by-case basis.
UTB Guide to Property Finance
CASE STUDIES
study 1
£366k bridging loan to acquire two refurbishment opportunities at auction Borrower: Property investor/developer through their Limited Company Amount: £366k Loan type: Bridging Finance Term: 12 months Location: North West LTV: 59% Project type: Auction purchase of two houses to refurbish and sell Special features: » 100% funding of purchase costs and works » Properties in poor condition, with 1 unmortgageable UTB’s bridging finance team was approached by an experienced property investor/developer seeking to buy two houses at auction. Both properties were in poor condition with one being unmortgageable. The borrower intended to buy both through their limited company, remodel, refurbish and then sell them on for a profit once improvement works were complete. No planning permissions were required, and the borrower had successfully completed similar projects. UTB was able to use the borrower’s unencumbered home together with the two purchased properties as security for the £366,000 loan which provided 100% of the purchase funds and works costs. The schedule of works and costs provided, together with the post-works value of the refurbished properties, was supported by UTB’s valuer. With the works estimated to take four months, the 12-month bridging loan term gave the borrower ample time to complete the projects and achieve the sales required to repay the loan and earn a tidy profit.
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UTB Guide to Property Finance
study 2
UTB steps in on £2.7m development when original lender refuses to extend repayment term Borrower: Developer Amount: £1.8 million Loan type: Developer Exit/Sales Period Finance Term: 12 months Location: South East LTV: 65% Project type: Six high quality apartments Special features: » Refinance and time extension » New to Bank borrower » Swift turnaround despite COVID-19 restrictions UTB’s team was approached to refinance a development loan when the borrower’s existing lender caused project delays and declined a request to extend the term of the original facility. The developer was building six high end apartments in a sought-after location south of London. Progress was slightly set back by delays in material and fittings deliveries and utility connections caused by the Covid-19 restrictions. However, the main obstacle was created by their lender suspending the release of funds during the first lockdown and demanding a revaluation of the project. Without funding, the borrower had no option but to temporarily suspend construction works until a revaluation could be arranged, which had a domino effect on the progression of the build once funding was eventually restored. With completion delayed and the sales period shortened, the borrower requested a facility extension to enable them to properly market the new homes and give them the best chance of achieving the projected sales values. The lender refused to extend the facility and the borrower faced punitive charges and interest beyond the original repayment date. Although the borrower was new to the Bank, they nonetheless demonstrated a strong background in construction and evidenced their ability to successfully deliver and sell high quality schemes. The loan was swiftly agreed and once the final building control inspection had taken place the original facility was settled. UTB’s £1.8m Sales Period Loan gives the customer up to a further 12 months to market the homes and achieve their maximum sales values.
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UTB Guide to Property Finance
study 3
UTB funds £6.7m north west development in JV with Housing Growth Partnership Borrower: Regional House Builder Amount: £4.16 million Loan type: Development Finance Location: North West LTGVD: 62% Project type: Greenfield development of 25 family homes. A mix of 2-5 bedroom houses and bungalows Special features: » New to Bank customer » JV with Housing Growth Partnership » Original lender withdrew funding offer due to Covid-19 lockdown UTB is funding a £6.7m development of 25 new family homes in a rural Cumbrian village. The scheme is being undertaken by experienced and successful regional housebuilder in a joint venture with the Housing Growth Partnership (HGP). UTB was approached by the borrowers after the original funders withdrew their offer following the onset of the first Covid-19 lockdown. The developers were within weeks of completing the purchase of the c3.2 acre site and the withdrawal of the funding only added to the housebuilder’s pandemic challenges. Both UTB and the housebuilders have an existing relationship with HGP and, despite the travel and operational difficulties presented by lockdown, all parties worked hard to get the project back on track. With the £4.16m UTB funding in place, the borrowers proceeded with the land purchase and groundworks have now commenced. 14
UTB Guide to Property Finance
study 4
Bridging enables the swift purchase of an unmortgageable future home Borrower: Home buyer Amount: £1.2m Loan type: Bridging Finance Term: 12 Months Location: London LTGVD: 64% Project type: Purchase of unmortgageable property Special features: » Purchase via sub-sale required swiftly upon grant of probate » Property configured as three flats requiring conversion back to a single dwelling » Structural issues UTB’s team was approached by a broker acting on behalf of a client who wished to purchase a large, detached house in London but with various challenges to overcome. The house was arranged as three flats with planning permission in place to return the house to a single dwelling. It was the borrower’s intention to complete the refurbishment and have the property as their main home. In its current configuration and condition the borrower could not obtain a conventional mortgage to complete the purchase. The property also showed signs of structural movement which required underpinning. A bridging loan would provide the borrower with the funds required to buy and renovate the property with the exit being a refinance to a residential mortgage once the transformation was complete. A further complication was that the house remained under probate and was being purchased as a sub-sale from someone who had bought the house at auction. Completion of the purchase was required within 10 days of probate being granted. The application was received by UTB on the 12th of April. Despite a full valuation, structural report and detailed schedule of works being required, the loan completed on the 29th April within 10 days of the grant of probate.
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