Development finance

Rate hikes see flight to fixed-term development finance lenders

Recent interest rate hikes have seen borrowers looking to fixed-rate deals in order to provide assurances of their monthly mortgage repayments.

The rising rate environment has highlighted the importance of fixed over variable rates on development finance loans for property developers – a complicated topic, according to Barney Iles, senior lending manager at BLEND Network.

“‘If rates go up, will my development finance costs go up?’ This has been the question on virtually every property developer’s lips over the past few months,” he said.

Iles explained that the answer is yes and no, as it depends on whether developers are using fixed rate development finance facilities or facilities with a direct link to the Bank of England base rate.

The Bank of England raised interest rates to one per cent earlier this month, which represents its highest level in 13 years.

Many industry figureheads are expecting the base rate to continue to rise over the course of 2022, which is likely to push more borrowers towards fixed rates over trackers.

Iles said that if borrowers are using variable rates with a direct link to the Bank of England rates, then the current rate hike cycle means that their pay rates or total cost of their debt have already increased in line with the higher base rates.

“However, if they are using fixed rates, then the cost of their debt remains unchanged throughout the loan cycle, therefore providing them with increased certainty,” he added.

Fixed rates have traditionally been more popular than variable rates with property developers because most developers prefer the security they offer when interest rates are forecast to rise, according to Iles.

“With the Bank of England warning that inflation could hit 10 per cent by the end of the year and the bank determined to do whatever it can to rein in soaring prices, many developers have raced to the certainty of fixed rates,” he said.

UK inflation has risen to its highest level in 40 years, with government figures showing the Consumer Prices Index (CPI) rose by nine per cent in the 12 months to April 2022, up from seven per cent in March.

The previous record high occurred during a recession in March 1992. Many industry experts believe if inflation and the economy continue on their current path, another recession is possible.

Iles said that not all lenders are able to offer fixed-term development finance loans because a rate hike could mean that the lender’s source of capital becomes more expensive.

“BLEND Network’s source of funding, family offices, and ultra-high-net-worth individuals mean the lender has a fixed cost of funds and can therefore offer fixed rates,” Iles said. “Indeed, it recently announced that it had secured £120 mn committed capital from a syndicate of family offices to deploy at fixed rate in the market.”

On the issue of a continued rising base rate, Iles said property developers already have enough on their plates with challenges such as the rising cost of materials and skills shortages.

The cost of labour was also a factor behind the spike in operating costs due to the ongoing skills shortage that has been drastically exacerbated by the pandemic.

“Property developers do not need more added sources of uncertainty, and that is why fixed-rate development finance facilities have become so hugely popular in recent months,” Iles said.

Iles said that was also one of the reasons BLEND Network have always believed in fixed rates as opposed to variable rates.

He said the firm had a team of experts with backgrounds in property and finance that allow it to understand what developers need and provide some much-needed certainty.

“Fixed rates put developers in control by eliminating the uncertainty around the cost of their debt,” he said. 

A guide to development finance

Sonny Gosai

Senior sales development manager, Norton Broker Services

Getting the right property development finance in place is essential to the success of any development project. Yet with such a wide range of borrowing options available, navigating the funding choices can be overwhelming for anyone new to the market.

Development finance is essentially a form of short-term lending used to provide a cash injection for any form of building or refurbishment project. It can cover the construction or refurbishment of any residential or commercial property, such as offices, hotels, and restaurants, and includes term loans, mortgages, and mezzanine finance (a combination of loans and equity).

Due to the complex and individual nature of many of these extensive projects, there are several different development finance options available, depending on the type of project being undertaken.

Typically, development finance is used for large-scale residential or semi-commercial projects, such as ground-up builds, which are constructed from scratch, as well as commercial-to-residential conversions.

These projects often require large loans that can reach several million pounds, have longer terms of up to 36 months, and have a construction loan draw-down agreement that is signed off in stages as the work progresses.

One of the main differences with this type of loan is the way in which the loan value is calculated, with both the value of the land and the cost of the construction considered separately but still accounted for as part of the same transaction.

Typically, the maximum gross development value (LTGDV) is often around 70 per cent, with the loan-to-value calculated on the estimated value of the property on completion, while borrowing for the development work itself can equate to between 85 per cent and 90 per cent of the total value of the cost of development, with some lenders also funding 100 per cent of the works.

Given the increased risk to the lender that such projects entail, development finance comes with a higher interest rate than other forms of finance, but once the project comes to a close, there is an option to move to a development exit loan, which will have a lower rate.

Typically, this is a short-term bridging option that is used to pay off the outstanding loan on a recently or almost completed development, and repayment is centred on the sale plan for the project. This can be an extremely complex process, particularly when single units are being sold off, and lenders often require detailed plans on potential sales in order to recoup the sales proceeds and reduce the loan value.

For those completing a substantial refurbishment of a residential property, including the conversion of a commercial property into a residential property, a refurbishment finance loan can be used with or without the need for planning permission or building regulation approval.

This is secured using a first charge loan on the property with the LTV based on the completed development value. Interest can be rolled up and paid in one go alongside the loan when the project is completed, and, in the majority of cases, the maximum term is 18 months.

Development finance is extremely complex, and lenders always require a detailed plan of the proposed project, as well as proof that it can be completed and that the loan can be serviced, before any agreement can take place. Using a specialist like Norton Broker Services can help brokers navigate this unfamiliar territory and provide them with the support they need to conduct business in this niche sector of the market. 

Why is development finance so complicated?

Richard Basso

Managing director, Lowry Capital

If you’ve ever arranged development finance for your client, you’ll know how difficult and frustrating it can sometimes be. Developers often need to have a long and proven track record. The required supporting documentation can be extensive and burdensome. And the drawdown process can be slow and expensive.

At Lowry Capital we don’t think development finance should be this way. So we set out to provide a simplified development product, which makes funds easily available to property developers throughout the UK – helping them to complete projects on time and maximise their profits. Our funding works for developments of all sizes, from single houses to larger projects.

OUR FUNDING IS SIMPLE AND EASY TO DRAW

We have a unique approach. Our development finance has been designed from the ground up to be streamlined, simple, and easy to draw. Moving away from the traditional development finance model, we provide developers with flexible funding, tailored to fit their schedule of works. Our hands-off lending approach means developers are in full control of the development and no quantity surveyors are required.

FUNDING THAT WORKS FOR DEVELOPERS

It is crucial that development funding work for the developer. Strong cash flow is vital to moving developments forward smoothly, which in turn maximises profits and reduces stress for the developer. Our funding model enables developers to keep a good percentage of sales revenue on each unit sold, which significantly boosts cash flow.

WE FUND FIRST-TIME DEVELOPERS

Our development funding is available to firsttime developers, who are often excluded from the development finance market. With Lowry Capital, previous experience is not essential. If a developer has a good team in place and a credible proposition, then we are always happy to lend. After all, how does a developer get experience without the funding to get started? We recognise developers have to start somewhere, and we’re delighted to fund many first-time developers throughout the UK.

A FLEXIBLE PARTNERSHIP

Our funding can be drawn down in stages, as and when the developer requires it. This helps keep funding costs to a minimum. We understand that developments don’t always run smoothly (indeed, they very rarely do!) and that developers need flexibility and understanding from their funder. We provide a personal approach, and our drawdown process couldn’t be simpler, with a minimum loan of just £25,000 (maximum of £4 mn) available within days.

If you’d like to understand more about how our development finance works, we’d love to hear from you. 

At Lowry Capital, our development finance has been designed from the ground up to be streamlined, simple, and easy to draw

Glasgow Office 0141 471 9557

www.lowrycapital.scot

Manchester Office 0161 499 7912

www.lowrycapital.co.uk

Fast & Flexible Funding for Property Developers

£25k to £4million Within Days

At Lowry Capital, our development funding is simple and easy to access. We lend on a wide range of developments throughout the UK. Here are a few examples of recent projects we've funded...

Funded: £450,000

Funding for the Development of 8 Holiday Homes

Location: Remote Scotland Timeframe: 12 Days Funded: £3,168,000

Funds to Convert an Office Building into 32 Flats

Location: Fife, Scotland Timeframe: 22 Days Funded: £104,000

Funding for a 4 Bedroom Detached House

Location: Barnsley, UK Timeframe: 15 Days

Funded: £2,300,000

Funding in Six Stages to Build a Retail Park Funded: £700,000

Funding to Complete a Development of 14 Houses Funded: £820,000

Development Funding to Complete 6 New Bungalows

Our real-world lending approach

Mark Standley

National commercial director, Assetz Capital

Cast your mind back to 2011. We were still feeling the fallout of the global financial crisis, and bank funding for businesses was in short supply. Couple that with the impact of deposit rates slashed to near zero by banks and building societies, and it’s no wonder people were struggling to secure a fair return on their money and protect against inflation. Hard times!

There’s always a light-bulb moment behind every great idea – and it was no different for us. With Chris Mellish (now CTO), our head of property David Penston, and CEO Stuart Law, we brought together our collective experience and industry knowledge not only to address the disproportionate grip of the more traditional banks, but to offer a simple and fair way for SMEs, which often struggle to access finance, to borrow through our marketplace. Thus came about Assetz Capital in 2013.

Through our development finance, commercial mortgages, and bridging finance, we’ve pioneered what we call real-world lending to meet the needs of modern brokers who increasingly want to drive potential growth for their clients and have a positive impact on the world around them.

To date, we’ve lent over £1.5 bn – and are targeting record levels of lending in 2022. In the last couple of years, we’ve funded the construction of around one in every 12 new homes built by SME housebuilders in the UK. This is all driven through our nationwide team of regional relationship directors – technical and highly experienced finance professionals.

Change is constant in the lending market. Two years ago, we all found ourselves in the middle of another far-reaching crisis, this time with the COVID-19 pandemic. We were initially approved for accreditation as a lender under the Coronavirus Business Interruption Loan Scheme (CBILS) by British Business Bank, which preceded the Recovery Loan Scheme – both reactive government-backed loan schemes to help the economy through the pandemic.

To apply for a loan, all we ask brokers to do is give us a call to discuss their clients’ requirements. Assetz Capital has been and always will be a relationship business, so one of our relationship directors will set up a faceto-face meeting, get to know the borrower properly, and work to design an optimum funding solution for them.

Our team of relationship directors is supported by two other highly experienced teams: a seasoned credit team and a dedicated relationship support team. Among them, they look to apply common-sense principles alongside financial metrics. We don’t set the timelines, the customer does, and with a strong support team behind them the relationship director will ensure efficient, timely delivery as required, with regular communication throughout the process.

A comprehensive intermediary product guide is updated monthly on our website and emailed directly to brokers, providing a flavour of what we offer – a diverse range of propertysecured loan solutions for business. Minimum contribution and high LTV? Yes, we can do that. Larger borrower contribution and finer interest rates? Yes, we have that covered, too.

We’ve always believed that financial success and making a positive social impact are closely linked, a view we share with an increasing majority of brokers. We’re laser-focused on safely growing Assetz Capital this year to provide even more attractive opportunities for property developers and housebuilders, to support the growth of UK trading businesses and job creation, and to provide increasing numbers of energy-efficient homes to those who need them most. Large numbers of our intermediary partners see Assetz as the go-to lender for SMEs, and it’s our real-world lending approach, which we will continue to deliver, that solidifies that. 

Sustainability in action

Jaxon Stevens

Head of sales – south, Sancus

Sustainability: What are the practical implications for residential developers and landlords?

Preserving our planet for future generations involves making changes to how we have built in the past and adapting and refurbishing older properties to ensure they fall within acceptable EPC (Energy Performance Certificate) levels.

A significant proportion of CO2 emissions in the UK comes from the energy we use to heat and light our homes; the EPC is all about helping to reduce carbon emissions. The average house produces approximately 12 tonnes of carbon dioxide every year; by improving the build and specification of properties, we can go some way to reducing this.

Government legislation is now in place to make developers and property owners plan ahead and turn their attention to new EPC rules that will come into force in 2025, ensuring all properties meet an acceptable EPC rating of C or higher.

Currently, two-thirds of the private rented sector are known to have an EPC rating of D or lower, which equates to 2.3mn properties across the UK. Fines of up to £30,000 can be expected from 2025 (Lettingaproperty.com, “EPC Certificates for Landlords 2022: EPC”) under the new legislation, with the added complication that it may also become harder for owners or buyers to raise finance against these assets, too.

Properties are given EPC ratings when constructed, sold, or let to show how much energy they consume, how environmentally friendly they are, and how much energy bills will be expected to cost. Upgrading a property to an acceptable C rating could cost property owners tens of thousands of pounds, so access to finance will be very much at the forefront of their minds.

How can a property’s EPC rating be improved?  Loft and cavity wall insulation:

Properties built before the 1920s are more likely to have solid walls. Later than this, cavity walls are common.

Solid wall insulation can be installed on properties from either inside or outside.  Upgrading heating: Older boilers are considerably less efficient, often floor-mounted and open-flued. Efficient boilers are usually wall-mounted condensing boilers and can be up to 90 per cent efficient.  Glazing: Upgrade from single- to double-glazed windows.  Renewable energy: This is energy that is generated from natural sources, such as the sun, wind, and water, and that is naturally replenished. Domestic renewable options include solar power and heating, air source heat pumps, wind turbines, and hydroelectric systems.

Refurbishment of properties requires less material and therefore produces less embodied carbon (the carbon footprint of a material). While build-dependent, this could show a significant saving in annual operational carbon emissions for a project (Circular Ecology, “The Environmental Sustainability of Existing Buildings: Refurbish or Replace”).

With an estimated 238,306 long-term empty homes as of 2021 (Action on Empty Homes), the government aiming for the creation of 300,000 new dwellings a year by the mid-2020s, and a number of active property lenders with funds to deploy in the market, there is plenty of opportunity and activity currently in the property sector. 

Refurbishment rates from 0.55%pm

Fast, people-led, decision making Loans from £150,000 to £5,000,000

Up to 100% of refurbishment costs Day 1 LTV up to 75% excluding interest

Single point of contact

Simply email us and one of our team will be directly in touch contact@sancus.com > Residential > Semi-Commercial | Mixed Use > PRS Schemes | Auctions | HMO’s > Light to Heavy Refurbishment > Multiple Assets

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Indicative criteria only, each loan application is considered on its merits. Sancus Lending (UK) Ltd is regulated by the FCA, firm reference number 593992. Risk Warning: If you are co-funding you could lose part or all of your capital. Indicated returns, unless otherwise stated are shown before any provision for bad debts and may be subject to tax. Sancus do not provide private mortgages. Sancus Lending (UK) Ltd is incorporated under the laws of England and Wales, company number 7534003. Part of Sancus Group Holdings company no 57766 registered office Block C, Hirzel Court, Hirzel Street, St Peter Port, Guernsey GY1 2NL.