Chris Scott

Refurbishment loans: the three key factors for clients to consider




The reduction in demand and values in the London residential property market have been well documented over 2018, with changes in taxation, stamp duty and Brexit putting off buyers.

In response to these pressures, property investors are using refurbishment — typically six- to 12-month projects — as a way of adding value and increasing rental yields. There are huge opportunities here, but investors must also keep in mind the wider market dynamics. 

  1. Keep an eye on GDV and purchase price

With Brexit looming, there is likely to be further falls in property prices over the coming months, therefore, investors should be aware that their perceived gross development value (GDV) on purchase today may not be as high once a refurbishment is finished. 

This also means properties need to be bought at the right price up front. Negotiation will come into play here, with investors ensuring they have enough headroom in the deal to make a healthy profit.

Following Brexit, a likely revival in overseas interest and economic stability should help the market recover slightly, with us seeing a modest return to growth in Q4 2019 and onwards. 

  1. Planning gain and enhancement 

With some investors finding the planning process cumbersome and confusing, planning gain and enhancement is where our borrowers are seeing the biggest opportunity. That said, there is an overarching feeling that some local councils could be doing more to make the planning process simpler and faster. 

  1. Converting commercial to residential

We have also seen an increase in borrowers seeking planning for converting commercial property to residential and subsequently renting them as a house in multiple occupation (HMOs) or a holiday let.

The expected increase in rental yield for HMOs and holiday lets following a refurbishment is particularly attractive to developers looking to re-gear and retain their property as part of a portfolio. This, alongside regional expansion, is an area which we are excited about supporting through 2019.

Refurbishment revamped — up to 90% loan-to-cost

In November, we overhauled our refurbishment loans to support the increase in demand. To help borrowers increase their leverage and reduce the need for third-party investment or high-interest debt, we increased our max LTC to 90%. We also updated our pricing, loan size and works limit, and support to underserved areas of the market, such as foreign nationals, complex company structures and expats.

We have already seen a surge in demand, receiving 10 packs in the two months pre-launch, and 20 per month post-launch. Demonstrating our comfort with these types of projects, highlights have included a £1.36m refurbishment loan to a borrower looking to extend and refurb a four-bedroom, mid-terrace house in Putney, south-west London, with both the amount and loan structure something that many lenders were unable to get comfortable with.    

Despite the pressures on house prices and wider market uncertainty, refurbishment provides plenty of opportunities for investors and we look forward to continuing to support borrowers and brokers with this in 2019.

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