On the face of it, a large property development project – particularly a complex one – can appear to be something of an act of faith on the part of lenders or investors. For instance, a developer might be proposing to buy a site, demolish existing buildings and replace them with luxury housing over one to one and a half years. On paper, the return from selling the newly built homes will far outstrip the demolition and building costs, but a lot can go wrong. Costs might overrun or the market might take a downturn in the intervening period. The perceived risk can make the plan look much less attractive to lenders. As a result, finance can be difficult to secure.
But developers have a crucial advantage when seeking to raise capital to fund projects – namely the value of their assets. The Route – Finance Private Debt Platform takes these assets fully into account when assessing loan applications.
Why Lenders Are Cautious
It’s not surprising that some traditional lenders approach the property market with a high degree of caution. This can manifest itself in a number of ways. They might reject a perfectly viable application for loan finance because the nature of the project – or the sum required – falls outside their normal lending criteria. And if the entrepreneur in question is seeking a sum that represents 100% of the cost of the project, there is a good chance that red lights will begin to flash with the credit committee.
And the truth is, that many developers find it difficult to secure 100% finance for a project. That may be an understandable – or even prudent – reaction on the part of lenders. However, The Route – Finance believes that it shouldn’t be a knee-jerk reaction. In fact, if the right financial underpinnings are in place, even a 100% loan can make perfect sense.
The UK – particularly England – is a small and relatively crowded place. The land available for development is limited and in the residential market, housing shortages have pushed land and property prices ever higher.
Consequently, the sites on which a developer plans to build are valuable assets in themselves, as are the flats that form the basis of refurbishment project or the commercial premises that are to be knocked down and replaced by housing.
As a project proceeds, the nature and value of the assets change but they retain – and probably increase – their value. That, in turn, provides a high degree of assurance for lenders. It has also been a vital factor in attracting investors to The Route – Finance’s Private Debt Platform.
So what does this mean in practice? Well, most lenders will look at the business model behind a development – the sums required, the timeframe of the building project, the value of the assets, and the expected return and make an offer accordingly. A typical offer might involve 50-60% of the land purchase price and 70-80% of the build cost. It’s a time-honoured practice, and it means that the developer – in terms of his or her own commitment – has some skin in the game.
But The Route believes that flexibility is important. In addition to offering a range of solutions – including bridging loans, development finance and packages that include a mezzanine finance component – The Route is also open to applications seeking 100% of development costs.
The Route is able to do that because of expertise in the property sector and a comprehensive due diligence regime. Assessing asset values and the risks associated with the project is an important part of that due diligence. Equally important, The Route – Finance’s Private Debt Platform is funded by a community of High Net Worth Individuals, institutions, and family offices who understand risk assessment and who pre-commit funds to projects recommended. This ensures that there is capital available.
These factors have contributed to The Route – Finance Private Debt Platform’s growing popularity as a source of property development funding. In many ways, it is an ideal platform for property projects.
To find out more about The Route – Finance’s Private Debt Platform, call 020 3141 9040