7 minute read
Utilising bridging to acquire and fund refurbishment projects
ROUNDTABLE DISCUSSION:
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 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.
“[For] mainstream brokers who are used to dealing with vanilla product types, bridging is becoming more understandable to them.”
Over the past few years, Chris has witnessed numerous providers enter the arena (and, subsequently, refurb), making a broker’s role even more crucial.
“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 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. Bruno commented that, if you can fund the project pre-planning, then you can take advantage of the uplift in value.
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.
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.
“[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.
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 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.
