Simon Chapman of Pluto Finance gives expert insights on the key steps developers need to take when attempting to secure finance for their residential schemes, and what challenges might be in store currently
In this extraordinary year, with many challenges facing us, there still remains a strong demand for more and more houses and growth in the housebuilding sector. But, what do you have to do, as a borrower, to be in the best position to secure funding for your project, and what are lenders looking for when funding property developments?
Regarding the development itself, lenders will expect the borrower’s experience to filter through into the form and content, as they undertake a quick review of any scheme to gauge appetite. The site and geographical area itself are of key consideration. Have you studied the demand in the area for the scheme you are proposing? Whether that is demand for housing – and for what size of units – and for any commercial elements of the scheme. What are the costs of acquiring the site?
What are the costs of development? Do you have a contractor in place? At what price will you sell or rent the units, and what is the projected end value of the scheme?
A TRACK RECORD
Lenders will look for housebuilders with a proven track record, demonstrating their ability to deliver schemes of similar nature. Ideally, you should provide details of least two or three schemes that have already been built and sold.
Numbers are important here. Demonstrating the success of previous schemes will put you in good stead for providing the finance you need at each stage of development.
Most lenders will look to fund site acquisitions, development costs and development exit, so that once your development is complete, you can start the next project with ease.
This kind of funding can additionally include exit bridge and equity release. Anecdotally, towards the end of 2020 there appears to have been an increase in these types of queries from developers, who are looking at gearing up completed schemes through development exit bridge loans to release equity and acquire new sites.
Some lenders will also look to provide bridging loan facilities, enabling for example the borrower to fund a deferred payment for site acquisition and provide additional funding for enabling works on the site, or allowing time for the borrower to obtain vacant possession and enhanced planning consent before proceeding with the development finance for a project.
RESOURCED TO DELIVER
Due to land trading being at a premium, cost of materials being on the rise and a shortage of qualified labour, developers will have to ensure efficiency and deliverability is a key consideration.
Lenders will be looking for evidence that borrowers are not under-resourced to deliver the scheme, and that taking on another scheme won’t stretch them too far.
To that end, details of the method of procurement and the proposed professional team project appraisal should be included in your project summary.
Last, but most certainly not least, many lenders will want to meet their borrowers, and preferably on site. This way they can really picture the proposed development as well as survey the area, to make sure the reality backs up the figures and detail proposed.
Despite this extraordinary year we have been through, and the many challenges that Covid-19 has presented, the development finance industry is still very much open for business, and housebuilding is set for further growth in 2021.
Simon Chapman is lending director at Pluto Finance