Corporate Finance Associates Blog

Asset rich and cash poor, how many times have we heard that phraseology?  But what about ‘We can afford to pay it (the interest) and repay it on time but don’t have any money to put in’?  The concept of self certification mortgages has finally been put to rest and are no more, but we are still being asked to help businesses that espouse the latter scenario in that they will make good money from what they are doing, so repayments are easily covered, and will make a significant profit a short way down the line, but the lenders don’t like this approach.

The old saying about a banker is that he is someone who lends you an umbrella when the sun is shining but wants it back when the rain starts falling, very apt, but it should be remembered that is what they are, bankers, not property investors, not widget makers, not housing developers, so to expect them to take an entrepreneurs view rather than a risk takers view is wishful thinking.

Bankers want to see their borrowers share some of the risk, which is why even if a property can be bought cheaply, under what is deemed to be its market value, it is unrealistic to think that ALL of the money can be borrowed so some lenders have reverted to their ideal which is to lend a percentage of the market value or the purchase price whichever is the lower so that in every case the borrower is risking something, even if it is not cash but a charge on some other assets they own.

A good development deal is another case in point, the end profits may be good, but if the developer is taking no risk at all at any stage, even if they actually recoup it later, lenders won’t either.

Borrowing is a partnership, so put something of value on the line and you will get the support, try to do it without and the project will never happen.

The market has changed but realistic borrowers will still get the support their project deserves, they may just have to put the banker’s hat on for once.

If you have a proposition that merits investigation, do visit our contact page and get in touch, we will be honest enough to let you know what can be achieved.

We are asked on a regular basis to arrange funding for those building developers out there that are still keen to get on with residential and commercial builds, but the reality comes as a shock to many of them, that despite the “supposed” masses of money the banks are lending they see none of it, and indeed are unlikely to, at least at anything near the terms that used to exist.

In the pre-Credit Crunch days there were two essential ways to finance a development project, go with a bank who would usually lend up to 65% of the land value and up to 65% of the build costs drawn down in stages as the development progressed, or secondly go with a specialist lender who would lend up to 60% of the Gross Developed Value (GDV),  often resulting in less input from the borrower and very often 100% of the build cost covered.

In the former case, it was great if you had the funds, most developers didn’t as their money was still tied up in the last development that was now being sold, in the latter case, these forward thinking lenders made development funding a much easier proposition.

Well we have the Credit Crunch, and a lot of the GDV lenders either closed their books (some of them having Icelandic parentage) or took a step back to see what the market would bring, and the high street banks just refused to sanction new deals at all, but would not announce to the marketplace that they no longer had an appetite for this sector.  Out of all this however there remains some specialists who still know what they are doing and can still help with the smaller projects.

We are now 2 years on and after the spate of large developers shedding completed stock, by bulk sales or heavy discounts, and closing up other “in progress” sites after making them wind and water tight, we have seen a gradual return, as in certain parts of the country work is starting once again.

The lending climate has changed however, the GDV lenders are few and far between but will look at smaller residential deals (very few lenders at all are looking at commercial builds unless they are either pre-sold or pre-let to a reputable end user) up to say £3m.  They limit their total advance to about 50% of the GDV and expect the developer to exhaust his own funds first before drawing on theirs.  Interest rates are higher often 9% p.a. and if the interest is to be rolled into the deal rather than separately serviced, the 50% limit has to allow for payment of these  as well.

The banks are still there in a minor way but are not keen to lend in excess of 50% of the land costs, and a similar amount of the build costs and there will always be the need to jump through an extensive array of “hoops” first, so don’t expect them to be major players for quite a time to come.

We are seeing green shoots, and the demand will always be there for housing stock to satisfy the British desire to own their personal bit of real estate, but unless the deal represents a very attractive return, there will be challenges for quite a while to come.

If you have a development project you would like our input on do let us know and we can point you in the right direction.