Development finance round table

Few could dispute that these are disruptive times in the UK economy. Rapidly rising inflation and interest rates over recent weeks and months, and much talk of a recession, have brought into sharp focus the livelihoods of British businesses. Closer to home, quite literally, many property owners have worried about how they will afford escalating mortgage rates and even whether they will manage to keep their hard-earned houses and apartments.

For those behind the financing and developing of such properties, there could be challenging times ahead. Yet, as the government and the Bank of England strive to steady the country’s finances, bridging introducers continue to see development financing opportunities coming across their desks. And within the bridging market, there’s optimism its profile could grow among those struggling to secure finance within the general mortgage space. There is, perhaps, no more intriguing a time than this for a discussion of the development finance sector, bringing together a diverse selection of industry experts to better understand its evolution, what it takes to be successful, and how best to collate and deliver the information lenders need.

To share their insight on development finance and offer a framework for success in a highly competitive market, Bridging Introducer, in association with Sancus Lending Group, brought together six leading industry professionals. The panel featured Jaxon Stevens, head of sales for Sancus Lending Group; Kieran Payne, relationship manager at Aureum Finance; Matt Vincent, director of MCA Finance LTD; James Palmer, associate director of LDNfinance; Ross Wilson, associate director at Naismiths; and Harry Eddery, senior funding manager at LandTech.

To set the scene for the discussion, they first considered how big a part development finance played in their respective businesses and where the opportunities lay in the current marketplace. Kicking off the conversation was Jaxon Stevens from Sancus Lending Group, which is a specialist in development finance and property bridging. “Development finance is the vast majority of our day-to-day transactions,” he said. “It’s what we do – ground-up residential schemes across the whole of the UK. We receive a lot of our inquiries and business via intermediary networks, mortgage brokers, with some direct clients coming to us as well. It’s busier than it’s ever been, really, for us certainly. We’re seeing an increase in inquiry levels, lots of people trying to get schemes up and running. There’s been a wave of planning approvals, I think over the last six or 12 months, people making sure they can secure their funding and get deals moving forward, and we don’t really see that changing any time in the near future.”

Stevens’ positivity was broadly supported by the panel, including Kieran Payne from Aureum Finance, an independent finance broker that specialises in all forms of property finance. “There are going to be buildings to be built, there’s still going to be deals to be done,” Payne agreed. “So I don’t see the economy changing anything that we’re doing in the future.”

Matt Vincent, from MCA Finance, which specialises in bridging, commercial, and development finance, was positive, too. “I think there are more opportunities forthcoming, in the sense that there will be a greater need for advice,” he declared. “As lenders adjust their pricing structures or how they’re sourcing their funding, I think this will create the need for people like us to be able to compare the marketplace and really tally up people with the best lenders available to them. There is still a need to build homes. I don’t think there is anything really to panic about.”

It was business as usual, according to James Palmer, from LDNfinance, which is a team of high-value property finance, specialist, and protection professionals. “We’re getting lots of inquiries from other brokers who have got clients who are moving into ground-up developments and refurbishments, and it’s just about making sure they fully understand their clients’ requirements,” he said. “Not being frightened to go back and ask for further information.”

Ross Wilson, from Naismiths, a niche consultancy providing specialist services and advice to the “Timescale is everything – allowing yourself the time to go through the process, but also setting the expectation of when you want to complete” KIERAN PAYNE

construction and real estate sectors, offered some perspective in uncertain times. “I’ve seen various effects on mortgage market conditions far worse than we [have] at the moment,” Wilson shared. “We see developers moving from the larger-unit developments into more bespoke projects, focused on residential, primarily, which will typically attract cash buyers in the market, so they’re sheltering themselves from the effects of the mortgage market.”

The market was tough but fluid, according to Harry Eddery from LandTech, which uses tech to modernise and streamline development and bridging finance. “We have quite a chunky array of SME developers,” he explained. “I think there’s a lot of opportunity within the build-to-rent and retirement living sectors, and I am seeing more and more applications come in from both.”

The conversation then turned to how bridging introducers assessed the viability of schemes when they were approached with development finance opportunities. What were their key considerations?

“The first thing I look at in terms of the viability is the developer’s profile, because at the end of the day, if they can’t build it or don’t have the relevant experience, it can sometimes be a dead duck even if everything else works out,” Eddery advised. “So always look at the developer profile – what they’ve previously done and how big the schemes have been. Do they have the same geographical location, roughly, as the other schemes? Gross development value [GDV] benchmark it as much as humanly possible. All of these things matter.”

Vincent chimed in with his set of criteria. “Once you understand the likely project costs or central budget costs and repayment strategies, as well as having a suitable contingency to reflect the market we’re in, I think it’s just a case of matching up the relevant →

experience and loan parameters with the best lender.”

Understanding a deal and the client behind it was most important to James Palmer. “So, if the developer is inexperienced, is the team experienced?” Palmer questioned. “Can we use the team to enhance the deal? How much cash has someone got to put into the deal? Make sure that the planning permission is what they’re actually developing. Sometimes you get a deal where the planning permission doesn’t necessarily match up with what the initial proposal was. Typically, with experienced developers, they might be able to tweak it and achieve some more units, but it’s good to explain that to a lender.”

Profitability was key for Stevens. “Ultimately, the profitability of the scheme is ultra-important for everybody – so will our lender be able to get in and out and get their money back?” he ventured. “Is there enough time to get the project done, and then enough time to find that viable exit as well? We need to make sure that the borrower has the ability to cover cost overruns in the current climate and, of course, assess the build team, as well as the borrower themselves and their experience, really looking at them being the right people specific for those roles.” He added, “Understanding the site is really important, and actually getting on the ground, on site, and understanding and picturing what’s going to be done and how it’s going to be done.”

Payne, meanwhile, was clear about his priorities. “In the first conversation, we ask when you want to complete by and how much money you’ve got to put into the scheme,” He told the panel, “You come across developers all the time who have either got little experience or limited money to put into the build, and it completely changes the viability of the scheme and who you can approach. So we’re doing all the due diligence because, ultimately, it’s our reputation at hand when we’re going out to lenders.”

For Wilson, the quality of the information provided was all-important. “Especially in the current marketplace, the most successful schemes are going to be the ones that have been pored over in the greatest detail,” he reflected. “You can broadly split our client base into those who are rehashing schemes – they’ve completed from a year or two years ago, using that kind of data and just putting something together for the purposes of getting another scheme off the ground – and there are those who are looking at new schemes in isolation and looking forward and trying to anticipate inflationary pressures.”

What, then, were the pain points identified by the panel in their typical communications with clients and the planning process and, importantly, how could these be overcome? “Planning departments are typically understaffed,” Wilson observed. “We’ve had some huge economic and political events that have happened over the last 12 to 18 months. Collectively, these have created huge backlogs. So I think engaging early and establishing good relationships is a way of overcoming these problems, anticipating delays, anticipating a lack of responses, and just being proactive and trying to make sure that you are getting information submitted as early as possible.”

Palmer said that ensuring that all requirements were being fulfilled was key. “As a broker, I think we probably have more responsibility from our side to make sure that people are aware of some of those commitments they’ve got and highlight that we need to get these things dealt with,” he suggested. “Lenders, obviously, will set out the terms and conditions and timelines. So we just need to make sure that everyone’s on the same page – the broker, the developer, and the lender all need to be working together and communicating to make sure that there are no delays.”

For Vincent, lenders’ and clients’ perceptions often vary. “I think one of the most consistent things is that there’s a different level of expectation from a lender’s view on project experience and our clients’ view on project experience,” he stated. “Trying to really detail what they’ve actually done on previous projects and how that can be transferred into maybe a bigger scheme, or a different type of scheme, is really quite key, and that takes toing and froing away from the application process.”

Timing was all-important for Payne. “Timescale is everything – allowing yourself the time to go through the process, but also setting the expectation of when you want to complete, before you kind of go out to lenders, is absolutely key,” he remarked. “When we send out our initial shopping list, we typically go out for a little bit more than maybe others would at the outset. We like to have it on file.”

Eddery, meanwhile, said he was unimpressed to receive information that was scant on detail, poorly presented, and inconsistent. “For me a real pain point is sometimes understanding the developer’s preference and what their primary drivers are,” he reasoned. “Understand their aspirations, realistically, because if you can stick them with a lender that they can grow with, it makes everybody’s life a lot easier.”

Documenting relevant experience made sense to Stevens, “whether that’s for the developer themselves or the professionals they are using,” he said. “There are varying levels of planning, and it’s really key to understand the different elements of the planning process. It really does depend on where you are in the country, which planning team you’re waiting on, but these timeframes vary hugely. We need to see that that planning has been fully granted and the scheme can be built out as suggested. I’ve seen approved planning with endless lists of pre-commencement conditions, so it’s [a matter of] understanding these conditions and how you can move forward to put a spade in the ground as quickly as possible.”

Next, the panel turned its attention to the benchmarks that should be set in a project and how the approach to building cost contingencies has changed over the past year. Did our participants in the discussion recommend bigger contingencies now? “We definitely recommend higher contingencies,” Payne asserted. “It’s a safety blanket, ultimately, for the lender and the developer, and they shouldn’t be looking upon any less than around 7.5 per cent, really. Lenders will tell you their comfort spot is in and around the 10 per cent mark.

“There are always negotiations to be had, but telling the developer their build costs may vary – some of them will take it on the chin and understand the process, but some of them will not be too happy that you’re questioning what they think because they do this job day in, day out.”

The standard contingency now ranges from five to 10 per cent, suggested Palmer. “Some might even be using higher numbers – it depends on the scheme that you’re building,” he said. “It’s being able to discuss with the developer about their appraisal and explaining, as part of your process, that you are part of the team, you’re there to assist and guide them. Brokers who understand the development space should be looking at the appraisals and asking questions as to how they’ve got to their end numbers, because lenders are going to be looking at the GDV, asking, does this deal actually stack up? So you need to make sure that all the numbers make sense.”

A contingency should be project-specific, said Eddery. Ten per cent would not be nearly enough for a barn conversion, he estimated. “If it’s an experienced developer, one of the big names in the SME market, you might be able to cut that down a bit more, knowing your developer and knowing the appetite of the lender,” Eddery mused. “The cost-per-square-foot metric, there’s a bit of a feel for that, depending on the geographical location, but you get a feel for what’s realistic and what will get through and what won’t. So that’s a really good benchmark to have in place.”

Stevens pointed out that, given that the cost of labour and materials has increased, and procurement takes longer, a contingency of 10 per cent was a good starting point. “Less than that and you need a really strong story behind you, and you should have everything you need already sorted and the people in place to start on day one,” he recommended. “If it’s above 10 per cent, don’t challenge it. It’s there for your protection and it’s there to make sure the scheme can be built out. If there’s room for that, and a lender is prepared to put that in place for you, it’s for everyone’s benefit. There’s been a shift over the last year or two, where we really started to analyse the projects that have been live in the market and the delays that have come into play.

It’s only sensible to make sure that there’s a sufficient safety net and buffer in place to make sure the schemes get finished and everyone can win at the end of it.”

Contingency should only be used for unforeseen costs, and everything else needed to be budgeted, remarked Wilson. “We work with a variety of funders, some will maintain a 10 per cent contingency right the way through to completion and some will allow contingency levels to drop on a ratchet basis throughout,” he elaborated. “That’s one of the changes in approach that we’ve seen to contingencies on projects, which I think is sensible. So, open discussions with a developer about contingency, how it’s used, and what it’s there for. That’s important. You really need to get under the skin of schemes these days. I think the use of a specific contingency level is dangerous. I think every scheme should be judged in isolation. If 10 per cent ends up being the average, then so be it, but I wouldn’t go into anything saying because it’s this type of scheme it needs to be 10 per cent. We’re definitely seeing higher contingencies at the moment, just because of the nature of the market. It is the really good developers who look forward and look at inflationary pressures. These guys are clearly wrapping their heads around what’s coming.”

Vincent reminded the panel that there might be valid reasons why a smaller contingency was suggested. “Understand why it makes sense to perhaps have slightly less contingency,” he urged. “The developer may have good assets, good income streams already – they may be able to say, ‘I’ve got two buy-to-lets, I can refinance if need be.’ Also, there may be savings they’ve already established; maybe there are materials left over from a different project, maybe there are genuine labour cost savings. It’s still worthwhile exploring and pitching accordingly.”

The panel then shared their thoughts on what information introducers might overlook in terms of what they collated for lenders. “I want to be as confident as I can be as early as possible when I’m analysing any inquiry,” Stevens stated. “Quite often I’m not aware of the square footage of the new dwellings that are being put up, and that’s really key when I’m analysing build costs and sales costs. I can trawl through 100 documents on the planning portal and maybe find it somewhere, but it would be really useful to actually know what they’re building – what does it look like, what size is it, is there an increase in conversion? These things are often missed out, but they are all very important when it comes to making a decision, certainly.”

Eddery agreed. “Sometimes we’ve been lucky to get a CV,” he commented. “I think it’s the most important part of the whole transaction, getting a detailed developer’s CV. Sometimes, you may not even get a detailed appraisal; it might just be benchmark figures, which aren’t overly helpful. I like to get lots of information upfront, and you don’t see comp reports come over that often. The assets and liabilities [A&L] you very rarely see earlier on in the process unless you’re dealing with it yourself.”

The level of the detail provided and how current it was mattered most to Ross Wilson. “When we get a programme, it can be very thin, as opposed to a decent proper construction programme, which is very useful for assessing whether the scheme is going to hit its benchmarks,” he asserted. “We often get provided with headline construction costs instead of a breakdown, and it’s very difficult to tell from headline costs whether it is going to do what it says it’s going to do. We are often missing a lot of the secondary and tertiary costs of the scheme, so that includes the professional fees, insurances, section 106 costs. There’s a whole myriad of costs that form the full development costs, but there’s often a lot of focus just on the construction costs alone. Getting formal discharge notices and detailed information on things like the planning is useful for me.”

This area of the work can be challenging, Vincent confirmed. “Part of this has to do with relationshipbuilding and the information you’re getting, whether it’s from a direct client or an introducer,” he said. “Sometimes they don’t know the answers to a lot of questions you have, but they’re keen to understand – does it look viable? What are the indicative costs? So, although it can be frustrating, trying to do a more

detailed job and present it perhaps in the most efficient way, you need to try to build that relationship and then eventually get the detail you need at the right time. So I think it’s a bit of a balancing act.”

Payne shared that the developer’s information received could be lacking detail, causing problems down the line. “You get some terms, but if there’s not any substance behind them, when you get to credit you find out that it’s not actually what you’re going to get,” he explained. “It can completely change who you go to as a lender. We like to do a lot of the due diligence beforehand. We like to get a fair bit of information upfront, so you really understand who they are, what they’ve done maybe in the last five years, and understand the scheme itself, what type of amenities are in the area. We like to paint the whole picture.”

Attention to detail was paramount for Palmer, meanwhile. “Make sure that before you present something to a lender, you fully understand the transaction,” he told his co-panellists. “I think one of the key things that people don’t necessarily expand on too much is the team – so, who’s the contractor? Is it a Joint Contracts Tribunal contract? Have they got their own quantity surveyor who’s verified the numbers? Who’s the project manager, who’s the architect? When we have introducers, we try to get direct access to the developers. Sometimes it may be better to walk away from a transaction if someone won’t give you the information because if they won’t give it to you now, what’s to say they will give it to you when it’s actually required?”

As the discussion drew to a close, the panel was invited to share a final tip or key takeaway for bridging introducers seeking success in the development finance space. “I think it’s a case of just speaking to lenders and understanding what they actually want,” Palmer concluded. “If you can get as much of the information as possible and understand it, then I think that’s going to help people make the right decisions.”

Vincent said, “If you’re starting out, it’s really key to build relationships with your lenders, understand their process, understand where they sit in the market.”

Substance in detail was key to every good funder, Wilson emphasised. “All of the lenders we work with – Jaxon Stevens and Sancus, for example – are incredibly knowledgeable,” he said. “The property “You really need to get under the skin of schemes these days. I think the use of a specific contingency level is dangerous. I think every scheme should be judged in isolation” ROSS WILSON

knowledge they have is exceptional, and it’s the expectation for well-presented schemes. If you can know all the aspects of the scheme and get as much of that detail and substance together as possible, you’re going to get more traction with lenders.”

Eddery was keen to highlight the importance of good working relationships. “Make friends with your business development manager, because they’ll help you through the deal, especially if you’re newer,” he insisted. “Present the deal well. It doesn’t necessarily need to look like an oil painting but, at the same time, it needs to be readable and digestible. Know your benchmarks and understand the lender’s track record and reputation. That’s probably more key than ever, at the moment, with lots of funding lines moving around and chopping and changing.”

Payne agreed. “Really build that relationship with your lender,” he said. “If you’re at an early stage of the game and you get a ‘no’ to an application, really read the feedback as to why, to understand what their criteria are. At the outset, get all the details you can and understand the deal.”

Stevens was keen to reassure those newly exploring the sector. “Nothing that’s been said today has been designed to put anyone off moving into the development space,” he summed up. “It’s understanding what goes into the whole analysis piece in deciding whether we can move forward with a scheme. We’ve all been through and are still in a period of uncertainty, with COVID, the Ukraine war, inflation, and rate rises. If we can provide a little bit of certainty in someone’s life while they’re considering what they’re going to do over the next 12, 18, 24 months for some of these development projects, it bodes well. There are fewer surprises as you move through the process if you can get to a level of detail and understanding. It’s about moving to certainty as early as you possibly can.”