Development finance certainly saw some significant changes three years ago, when the number of development lenders dropped and funding became more difficult to obtain.

However, Bridging & Commercial discovered that there are still deals to be done within the sector and still a number of lenders who are genuinely willing to lend.

Who are the main development lenders?

We have identified these companies as specialising in development finance:

• Regentsmead Development Finance
  
• Bishopsgate Funding
  
• United Trust Bank
  
• Hampshire Trust
  
• The Helmsley Group
  
• Commercial Acceptances
  
• Dragonfly (development projects restricted to the Prime Central London Market)
• West One Loans
  
• Goldentree Financial Services
  
• Close Property Finance
  
• RBS
  
• Investec
  
• Affirmative

James Bloom, CEO of Regentsmead, stressed the importance of finding a lender with an enthusiasm for development finance. “Brokers need to identify the right lender for the loan and they need to ensure that they are actually dealing with that lender and not with another intermediary,” he said.

Director at Bishopsgate Funding, Patrick Ruane, explained that whilst development finance is more difficult to obtain than three years ago, there is still funding available from specialist lenders.

“The development finance market is an area with growing demand for funding, because the high street banks have no appetite for this type of lending at the moment,” he said.

The smaller pool of lenders has affected prices, however. Craig Scott, Director of Commercial 1 Limited, commented: “This has meant higher rates with products that have remained relative and allowed experienced developers to continue to trade and continue to make good return on investment.”

Director of Vantage Finance, Lucy Barrett, said, “The lack of competition has led to relatively high pricing, which means there must be decent profit levels in each and every deal.

“Some developers are still very sensitive toward current pricing, whereas others have accepted that low-cost funding in this area doesn’t really exist anymore.”

What do brokers need to do to secure development finance?

Noel Meredith of United Trust Bank explained: “Brokers need to assemble a comprehensive package of information before approaching lenders.”

Presenting the information to potential lenders in the right way is crucial in order to secure development finance for a client. “All brokers really need to present to lenders are the key facts in order to get a decision in principle. All Regentsmead needs to know to start with is where the borrower’s security is, details of the Gross Development Value (GDV) and the actual loan that is required,” Mr Bloom said.

Bishopgate’s Mr Ruane added: “It is important for brokers who maybe don’t have experience in this field to deal with a flexible lender. We can adapt our levels of service to suit what the broker needs.

“We are quite happy to deal directly with the client if the broker wishes us to, in order to speed up completion. We also obtain most of the documentation ourselves to save the broker time and effort when submitting applications to us.”

Mr Bloom emphasised that what intermediaries really need to know is what the appetite is like in the market. “The most important thing is for brokers to have relationships lined up ready so that when they find a borrower the deal can go ahead straight away.

“Intermediaries need to go out and drag in business and when the average fee is around 1 per cent of the deal, there’s a pretty good incentive to do so.”

What’s the GDV?

“The type of development affects the ability to get funding,” explained Mr Ruane. “Commercial development funding for speculative builds is very difficult at the moment, due to limited exit routes for the lender.

“However, for the right deals at sensible loan to values and where the underlying security property is good quality with good rental demand, they can still be funded at LTVs around the 40-45 per cent of GDV mark.”

The current GDV offered by most lenders remains at 50-55 per cent for senior debt, rising to a maximum of 65 per cent for mezzanine, or top-up, finance.

Mr Meredith explained that, while some lenders are mainly biased towards London and the South East, ‘the main objective is to build and sell, so it is important to build where the market is most active’.

The borrower’s experience is vital

All the lenders we spoke to emphasised that funding is very much dependent on the individual borrower’s experience and circumstances.

Mr Meredith explained that development lenders don’t tend to operate tick box underwriting systems. “We look at the viability of each project and each borrower’s experience in order to form a judgement.

“As a result, I would suggest that this is not a market where a first time developer will find it as easy to secure a loan as someone with years of experience.”

Lucy Barrett agreed. “Most lenders will not consider a proposal where the client does not have good experience, and that must be of buying, developing and selling themselves, not just of project management or building experience.”

Peter Davies, Senior Adviser at Coreco Group Limited, added: “Almost without exception lenders want experienced clients, with each scheme still then viewed on its own merits. After the experience the question is then how much is the client personally investing in the project?”

Craig Scott said: “Where lenders have come unstuck has been with products that are priced too low and with loan to values too high coupled with a lack of development experience from the client. The current climate has allowed the developers who have the relevant experience to remain in the market and if anything separate the wheat from the chaff.”

Looking to the future

It appears that demand for development finance remains strong in the current climate – a trend that looks set to continue in the future, with the government’s recent implementation of several incentives to encourage housing projects, including a pledge to promote self-build and affordable housing.