Up until the end of 2007, the UK development market was booming with the most successful years stretching back to 2001, where there was always a wide a variety of lenders to choose from to finance new ventures. However, as with most markets, the development sector took a severe nose dive at the beginning of the economic downturn. But are we seeing a re-emergence of the sector? Adam Tyler, CEO of NACFB explores the market and explains why there may be reasons to be more optimistic about the sector’s potential in the coming years;
“As with most other forms of commercial finance, development finance took a major dip just after the economic downturn but there does appear to be some light at the end of the tunnel. Recent reports from RICS and other industry bodies seem to be indicating that the market is re-emerging and the National association of Commercial Finance Brokers has noted a welcome return of some key players in the development market.
The period from the end of 2007 to the end of 2009 was a particularly bad time for development finance and the association received a great deal of queries from members desperately wanting to know which funders were actually active in the market – in truth, there were a few if any at some points. Many of the main lenders in the sector had pulled out of the market leaving a dearth of funders to approach for development projects, with only a two specialist lenders in the market willing to look at the occasional deals. The NACFB carries out an annual survey of all types of Commercial Lending and the Buy to Let funding stats really fell through the floor and the graph for this finance was matched for its spectacular fall only by the one for development finance.
It certainly appears that prime markets such as London have seen a significant increase in development projects and I believe the development market is one of the key components to growth and recovery in the UK. A recent RICS report indicated a surge of activity, particularly in London and the South East. The report stated that surveyors had reported a 43% increase in demand in the first 3 months of 2011 – certainly an encouraging figure. Central London saw a net increase from 17% to 39% so it is obvious that there is an appetite out there in the market. Primarily, this interest for development and office space comes from the financial service sector looking to expand and needing more office space.
During the second half of 2009 United Trust Bank was one of the few still prepared to lend to developers. Noel Meredith of UTB says “Although the quantity of proposals remains low in the market the quality is high. We are receiving proposals from well-capitalised developers seeking from nought to fifty percent of the site costs and up to 100% of the build cost. Although a resurgence in strong proposals might encourage quiet optimism, it is worth noting that there continues to be a strong regional bias with such proposals predominately from London and the South East. However we believe that there exists a solid pipeline of quality sites and quality developers upon which to base a recovery in our sector, when the residential mortgage funding which underpins the housing market returns.
There funders both specialist and national that are looking outside of the South East region. Commercial and in particular Residential Development is seen as a better opportunity for Commercial Finance Brokers now looking to place deals for their clients, but there are clear guidelines on what can be funded and how it has to be structured. So, forget really speculative opportunities and this will include City Centre apartment developments or anything where there is not a high level of financial input from the developer.
James Bloom of Regentsmead says “Banks have suffered huge losses from overexposing themselves to the property sector which has resulted in their appetite for such projects becoming largely non-existent. This together with the credit crunch has caused a massive liquidity crisis. Although other lenders are now starting to dip their toe in the water in terms of providing development finance having a long standing relationship with a lender who has provided finance throughout several downturns is vital and this should always be borne in mind when deciding who your finance partner should be”
The risks remain with a fragile housing market getting regular reports on low or stagnated growth, but with the request for the right percentage of gross development cost, (GDV) which is usually around 50%, there are now more opportunities to borrow development finance than there has been since the end of 2007.
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