As euphemisms go ‘rollercoaster ride’ doesn’t really begin to do justice to the unprecedented peaks and troughs experienced by the development fi nance sector over the past four years.
From the deep lows of Covid- induced lockdowns, to the highs of booming building, infrastructure, and DIY projects by the middle of 2021. Now, a run of 14 successive
interest rate rises that only came to a halt in September, the headwinds of house building are once again blowing strongly.
While the commercial building sector seems to have stabilised, October saw house building decrease for the 11th successive month, due to a lack of demand and subsequent cutbacks to new projects. It’s not all bad news, of course. The sudden switch from easy money to a sharply tightened monetary policy is finally beginning to see inflationary pressures easing for the construction sector, and this – along with the normalisation of supply chains and the shortening of lead times – is undeniably good news.
Indeed, October saw purchasing prices decreasing at their fastest rate in over 14 years as vendors passed on the lower costs of timber, steel, and transportation. However, it’s the trend of recent years that, just as green shoots start to appear, another disaster seems to
befall us. The first global pandemic in 100 years, the invasion of Ukraine, and now the horrific conflict in the Middle East. If the latter escalates, it has the potential to disrupt the fragile recovery of the world economy, and in the UK, delay the point at which interest rates start to drop – or even force the Bank of England to make further increases. This threat,
coupled with the lack of any visible Government plan to address the steep downturn in housebuilding rates, does not bode well as we head into the difficult winter period.
Collaboration is key
The net result of all the above uncertainty is that, now more than ever, it’s harder for developers to accurately schedule works and to project build costs and cashflow.
Contingency funds have generally increased in size, to 10% or more of the total build costs, but uncertainty can still surround the budget and whether it’s sufficient to get a scheme completed.
This is the point at which the best brokers and specialist development lenders come into their own. At Saxon Trust, our office-based team moves quickly and collaboratively to
analyse the viability of every single development and development exit enquiry we receive, large or small. Within our ranks, we have individuals who have been successful developers, and this means we can offer unique and incisive market observations and solutions.
Even when we decline an enquiry, we always do so in the most constructive fashion possible, providing real insight into the dynamics of the planned project – insight that can be of great value to both the broker and developer. We have all learned a great deal since the beginning of 2020, and at Saxon Trust, we pride ourselves on adding value, even on those deals that we choose not to progress.
A specific area of concern in the current market is the number of bridging lenders writing growing volumes of development exit loans. Ground-up development is massively more complex than straightforward bridging loans, and taking on board a part-built scheme
can be inherently dangerous, even for highly experienced development underwriters.
The temptation for bridge lenders – under threat of breaching their non-utilisation clauses – to write large development exit loans is obvious, but the stark reality is that we are now, sadly, seeing stalled schemes taken into possession by lenders which were never really qualified to write development exit deals in the first place.
As a specialist development lender, we are known for our deep-rooted market knowledge, the strength of our analytical skills, for working with best-in-class professional partners and
our use of market leading technology. It is this attention to detail, combined with our understanding of planning legislation, varied geographical locations, and commercial into residential conversions, and crucially our hands-on experience of building many ground-up units ourselves, that allow us to write deals others will shy away from.
The value of working with a lender that genuinely understands the development finance space should never be underestimated. Strong partnerships are often forged in times of adversity, and by working with the right lending partners, both brokers and developers can
look forward to a positive 2024-25, whatever unforeseen problems may be coming down the track.