Corporate Finance Associates Blog

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.