The current economic climate makes it more challenging than ever to make sure your development doesn’t get delayed or paused.
And in an industry where the adage “time is money” couldn’t be more true, it’s crucial that you work with a funder who will offer stability and flexibility throughout your project.
In our recent webinar, we were joined by Harry Eddery, Senior Funding Manager at LandFund, and Neil Leitch, Lending Director Development Finance at Hampshire Trust Bank, to talk through the current state of the funding market – and the key things developers should consider when looking for funding.
5 things to consider when looking for development funding
1. Current interest rates
There was a lot of negative commentary about the property market towards the end of last year – largely sparked by the Mini Budget. This, alongside some other ongoing socio-economic factors, caused interest rates to go through the roof.
In turn, this led to a desire from a lot of developers for fixed-rate lending. However, with the market now looking more attractive in the next 12 to 18 months and interest rates set to go down, we are already seeing more developers inquire about variable rate lending again.
The market has fluctuated a lot in recent months and years, and thinking long-term about the direction of interest rates can help you secure the best terms for your project.
Although interest rates are very important, there are other parts of a deal that need to be scrutinised, such as fees and loan structure.
2. Funder flexibility
Working with a funder who can adapt to market conditions is a key way to prevent a pause in development.
Building in a contingency and interest buffer is a strong starting point.
“Having the adequate sum of contingency is very important. It is different to what it previously was…the whole industry seems to have gone to 10% as a standard.” – Harry
Neil also pointed out that how they structure a loan at HTB is equally important – like building a buffer into the interest roll up tranche so that in the event that underlying rates increase, there’s increased protection.
Agility in reacting to trends and shaping the deal at the outset, as well as being able to respond quickly to any major changes throughout the project, will put you in good stead for delivering your project on time – and within budget.
3. Build costs
Rising build costs have resulted in changes to how a scheme is delivered.
A big shift has been in the need to lock in costs earlier on in the process. Whereas, before you likely ordered windows and doors at the relevant time, but now you may be storing these on-site to ensure that prices don’t go up later on.
Having more valuable goods on-site can add further difficulties, but more banks are becoming adept at funding advance payments.
The difficulty in securing construction materials has also had a knock-on effect on credit terms.
“The supply chain has used covid, in my view, to tighten up credit terms. So, again whilst 60-30 days credit terms were typical in the construction sector pre-covid. Now, it’s much more common for 30 days and less. And high-value items borrowers are having to pay in advance for.” – Neil
4. Regulated vs non-regulated
Depending on your situation and preference, you’ll need to decide whether you want to work with a regulated bank or a smaller unregulated entity.
A regulated entity will be overseen by the Financial Conduct Authority and provide an element of safety and certainty. This can be particularly important when the going gets tough as there will be increased safety with your drawdowns.
Not being able to quickly access funds when you need them is a common reason why development projects get delayed and it’s important to safeguard against this. Or as Neil put it:
“We can hardly expect a developer to be agile and be able to negotiate good terms with their sub-contractors if we delay getting money out to them. They need to have the cash from the bank to operate in a way that suits them, and indeed, suits us.” – Neil
5. Use of technology
Change doesn’t happen particularly quickly in development finance. But technology is playing a huge role in driving change – both in terms of assessment of the transaction at the front end and due diligence.
As a broker, we at LandFund also use our product ecosystem to help drive efficiencies and ensure that our customers are getting the best terms possible.
We use detailed comparables and planning data to benchmark this against the borrower’s estimates and ensure that the deal is fully evidenced and key context is provided.
We make sure all this data is packaged correctly and passed over to relevant funders so that the deal can be correctly sold to the right entities. Answering the underwriter’s queries before they even have a chance to ask them.
On top of this, our ecosystem allows you to source sites with LandInsight, validate through our appraisal tool, finance through LandFund, and connect with other land agents and developers through our Community platform.
Watch the webinar on-demand
To catch up on more tips on how to seamlessly secure development finance and work with a funder who ticks all the right boxes, watch the on-demand version of our webinar below.
During the session, they covered:
- Recent changes to the development finance market
- Impact of rising build costs on the funding process
- Benefits of working with a challenger bank
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