Predictions of falling house prices:

On 13th July 2010 popular money website Thisismoney.co.uk reported that prices are set to fall.  They quote four leading economic "gurus" each predicting varying degrees of badness. They included:

• accountants PricewaterhouseCoopers
• the Royal Institution of Chartered Surveyors
• the Council of Mortgage Lenders.

The prediction in the thisismoney article is that property prices could remain depressed for at least the next 10 years, possibly even seeing £40,000 taken off the price of an average house by the end of 2012.  The cause of this continued depression is apparently the lack of employment and the prospect of higher interest rates.  No affordability to sustain current prices let alone any increase.

Actual falls in property values:

on 19th July 2010 the largest property website on the web, rightmove.co.uk reported a drop in asking prices of 0.6% from June's figures.  Rightmove state that mortgage approvals are running at about half the number of new properties being placed on the market.  Supply is outstripping demand.  Rightmove predicted that house prices would end the year at the same value as January 2010, therefore they expect to see the gains early in the year completely wiped out.

Property Development Funding still an option?

The general public and policy makers are naturally fascinated by the reports with some people accusing the media of talking the market down, to others saying that the basics of economics still hold true and the market has to be correct before things improve.

Property development funders are obviously concerned that they are not funding development ideas that will sit unsold for months, but believe it or not there are still quite a few funding opportunities out there for good quality developments.

There are still regional hotspots where local conditions are ripe for development opportunities.  So don't be too despondent about reports of a falling market, keep looking and keep asking lenders to consider proposals.

The High Court, in Bristol, has ordered the person to pay a whopping £133,282 in damages, costs and interest to Plymouth's Prestige Homes South West Ltd, after pulling out of a deal to buy two Zero 4 flats in Plymouth.

This is one of a number of cases that this property developer is pursuing against people who paid deposits on a number of flats but then walked away from the deals once property prices started to fall.

It would appear that in addition to deposits being paid, contracts were exchanged on an "off plan" basis.  This was common practice during the height of the property boom where investors were agreeing to purchase a property (often at a discount) before the development had started.  The property developer would then secure ongoing finance against the security of knowing that the sales would complete.

The challenge for the hapless investors was that the property values were declining, loan to values were following and many of them were faced with no option other than to pull out of the deal.  Sadly for them, once you have exchanged contracts you are committed to the sale and liable for consequential loss if you fail to complete.

This is not the only case of its kind, among the developers reported to have filed claims are Ballymore, which has lodged more than 130 claims, Trelford Homes, which has filed 50, and Imagine Homes which issued 40 before it went into administration.

There appears to be two types of purchaser affected by this situation; the would be homeowner and the property investor.

However some would be purchasers are putting up a fight. One group has formed the Berkeley Homes Collective. They say they are private purchasers only and that they were ‘mugged by slick sales staff’. They claim Berkeley Homes used “high-pressure sales techniques".

This could well turn out to be a tough lesson for property investors, one that could end up with many resorting to bankruptcy.

Coupled with increasingly aggressive funding terms at ever lower margins,and senior debts pushing past 90% of the value there was not much room for Mezzanine type arrangements.

And then we saw this advert:

When you need something bigger take a look at our ”Jumbo” Mezzanine Loans for Commercial Property Investments.

• Mezzanine Loans available from £5m to £50m
• Up to 90% LTV
• Interest rate from 15% per annum
• All asset classes considered, mainland UK only

Suitable for:

• Second ranking behind existing or new senior loan
• Partial pay down of existing senior loanRepair for breached LTV covenants
• Interest only

Go to original article

Which would appear to suggest that Mezzanine funding is back!

Well, think back a few years and you will recall that relatively inexperienced developers were able to make good money just by purchasing a property and hanging on to it for six months.  In fact several did and thought they were turning into professional property developers.

That may seem like a dig at novice property developers, but there is no doubt that some lenders were quite comfortable offering very high loan-to-value deals to effectively finance the purchase and development of sites.  They believed that they were safe in the knowledge that if it all goes wrong price inflation alone will ensure that they are secure.  And more importantly the set-up fees, interest rates and exit fees on these deals were really lucrative, meaning that the lenders were making a small fortune on deals that completed.

In today's market the lenders are steering well clear of anything that could hurt them, and this includes novice developers looking to turn a quick profit.

So What Can a Property Developer Do To Secure Funding?

In some respects it's back to basics.  Think about the eventual sales process and work backwards.  Identify sites that are in high demand arrears and focus on getting planning permission to create attractive and functional homes that will attract prospective purchasers easily.  Put plenty of thought in to the marketing process of the finished product, and be prepared to share that research with your financial partners.

At the moment many areas have an over supply of two bedroom apartments and a woefully short supply of affordable two and three bedroom family homes. Prospective property developers would be well advised to consider building more family homes to meet with the current demands.

As always location is all important, especially in a competitive market. It is crucial that property developers build the right product in the right place and complete the build quickly. The key is to find areas where there is a low supply but high demand, coupled with thriving local economy and strong employment opportunities, and good commuter links. Also consider less obvious areas where there are signs that employment opportunities are on the rise; however you will need to be able to prove where this assertion comes from.

When working with a finance partner, whether it is a broker or lender, it is really useful to listen to what they are saying, take on board their comments and demonstrate that you are willing to learn, and be guided by their experience.

Environmental issues are top of the political agenda with local authorities and individuals looking for ways to maximise their energy efficiency and reduce their carbon footprints. Think about whether your project is tackling these points, and if they are shout about it!

Lenders to have money to invest in good quality and well managed projects, and if you look carefully at the specialist property development lenders that were busy 4 or 5 years ago you may be surprised to see that the majority of them are still there, and they didn't take a penny of tax payers money to bail them out of bad deals.

You still may not be able to get 100% property develpment finance just yet, but with the right preparation and support you can still get some very good deals.

In a mezzanine scenario the bank loan is often referred to as the senior debt.  The mezzanine funder then supplies funding to "top-up" the senior debt to the required level.  The top up portion of the finance is generally going to be charged at quite high rates.  Some of the things to look out for when dealing with a potential lender:

• Willingness to lend up to 100% of the project costs
• Roll-up of interest.
• Ability to work closely with the senior creditor and other professional advisers.

In the context of property development finance it would be unusual for a mezzanine deal to be arranged if the developer is lacking in experience or has a poor track record.  You might expect the mezzanine funder to dig quite deeply into the viability of the project and the legal fees alone can be expensive.

One of the main attractions of mezzanine funding is the ability to pay the debt off quickly if surplus funds become available.  This means that the developer is only paying for the most expensive finance for the shortest time.

Once regarded as the funding solution of last resort, bridging finance has under gone something of a transformation over the last few years. It is no longer the preserve of the desperate house-mover but a valuable tool for savvy property investors and developers looking to secure a bargain.

The growth in the number of bridging lenders means that there is more competition, which in turn has led to more competitive rates and more innovation, particularly around the issue of exit fees and default rates. Many of the more well established lenders have been forced to change their business practices to keep up with this evolving market. Thankfully the practice of hiding crippling terms in small print will no longer be tolerated in a market dominated by brokers. .

We all know how frustrating it can be when a long chain suddenly breaks and these at the top look like losing their dream home. but there are plenty of other instances when bridging finance might be appropriate. For example an auction purchase which only has 28 days to complete, or a business which finds itself needing to find a substantial amount of tax money quickly.

Bridging Loans are often used for:

Auctions:
When purchasing property at auction the borrower usually has a deadline of 28 days to complete the process.  Although it is not uncommon for borrows to be told that it is possible to complete purchase using conventional finance in practice the funding is rarely available in time.  Having paid a 10% deposit it is vital that completion takes place within the deadline.  This is where bridging loans are most useful, once the valuation has been received legal completion can often take place within a few days.

Buying Property at Undervalue:
Approaching a mainstream lender with a proposal to purchase a property at under value is pointless as they will only consider the purchase price.  However bridging loans can be raised against the value of the property and not the purchase price.  This means that theoretically it is possible to purchase a property at discount without putting any money into the deal.

Debt Relief:
Business people often get into financial difficulties due to cash-flow problems.  These can be a result of trading problems or even unexpected tax demands, where there is enough equity in a freehold property bridging loans are an ideal solution.

One aspect of bridging loans which have caused the most concern is the perceived lack of transparency, many borrowers had complained that the rate
originally offered had been subsequently withdrawn and replaced with a much higher rate. The lender's would counter this claim by blaming the customer or broker for not supplying accurate information at the outset.  Therefore It is important to make sure that the terms of a bridging loan are explained in clear english, worth remembering that just chasing the headline rate could leave a borrower in future trouble.

We would love to hear you views on bridging loans, good and bad!

Firstly, the project will always need to show a substantial profit.  This can be a refurbishment or development scheme, but either way the sales figures will need to show at least 25% return on costs.  For a crude calculation simply add together the purchase price and development (or refurbishment) costs then multiply by 1.25.  For example if a site costs £200,000 and the developer is expecting to spend £33,000 the total costs are £233,000.  The sales price would then need to be at least £295,000.  Obviously this is a very rough calculation but it does give a good "rule of thumb".

The next major question that a property development lender will ask is "why is the developer asking for 100% property development finance?"  It is not unusual for a property developer to have all their available capital tied up in one project whilst looking for the next scheme, but there are a number of other acceptable answers.  The challenge comes when a property developer asks for high levels of finance with no provable experience and little support.

Over time a property developer will assemble a team of professionals to support them, this will be suppliers, tradespeople and specialists such as architects, quantity surveyors and solicitors.  This team becomes an asset and a good quality team can go a long way towards impressing a property development lender.

Because the risks to the lender are so high it is not unusual for them to monitor a project very closely, some developers have commented in the past they they find this quite uncomfortable!

100% development funding can either be supplied by one lender or, more often, be provided by a combination of a main lender and a second specialist lender "toping up" the funding.  Either way 100% property development finance is a very specialised form of funding and using a specialist broker can make all the difference.

[tags]100% property, property development finance[/tags]

This growth in the self-build market has not gone unnoticed by the mortgage lenders either, and you can probably expect to see more marketing money being spent by some of the established lenders to ensure they maintain their market-share. Obviously the mortgage requirements for this type of project are vastly different from a standard residential mortgage. Specialist self-build mortgage lenders (and brokers) have created specific products to cater for the diverse needs of the self-builder.

Property development is carried out in stages, and the funding of a new-build house is carried out in the same way. The first stage is to secure the site, there are websites around that are devoted to marketing single building plots. Most self-builders will be on the look out for plots that are complete with planning permission and require only slight modifications to the plans and confirmation of building regulations. The construction of the house is then carried out in stages, with a funding structure designed to work around each completed phase.

The type of funding that is put in place for a self-build is dependant on whether the borrower/builder intends to occupy the property, rent it out or sell it. For true self-build projects where the borrower intends to live in the property there some quite incredible deals available, including up to 100% of all costs – which alleviates the need for the applicant to sell their existing property.

Where the self-build in more speculative in nature, such as buy to let, there is slightly less flexibility. However it should still be possible to get some very competitive loan-to-values.

One final thought, property owners with a lot of land are choosing to build new houses in the garden and split the title of the property in two. If you're not too fussy about having acres of space it could be a useful way to top up an endowment or pension shortfall!

[tags]self build, property development finance[/tags]

In fact, there are plenty of lenders willing to assist with quite modest refurbishment schemes. In one recent case a borrower with limited experience wanted to raise property development finance to convert a "House of Multiple Occupation" (HMO) back into a single dwelling. Whilst the lack of experience does not necessarily present too many challenges, the fact that the property was a grade two listed building was always going to add complications.

The challenge with listed building consent is the potential for the development to go over budget, very often planners will place conditions on the use of specific materials etc.. In this instance the broker in question was able to place deal with a specialist property development funder who was very happy to consider merits of the case.

All too often the client's lack of experience in this type of project could have stopped the project moving forward.  In this particular case the lender and broker were very impressed by the clients determination and the quality of their preparation. Aside from the merits of the application the other major factor which allowed the conversion scheme to move forward was the borrowers willingness to work with their broker and to accommodate the lenders concerns

The main reason that this deal was able to proceed, was that the broker and client established a good rapport and understanding of what could be realistically achieved.

[tags]uk property development finance, property funding[/tags]

Meanwhile the mid-sized property developers are chasing the most profitable development opportunities they can get their hands on. Converting empty buildings into flats and upmarket apartments can turn a very healthy profit. How many neighbourhoods have lost their cinema or at least one pub to the craze for modern style luxury apartments?

This leaves the existing housing stock, much of it ageing and in need of substantial repair available to a new breed of property entrepreneurs. To accommodate this growing need Property Development Finance has evolved with the market and has developed into a “vehicle” where aspiring property developers can quickly refurbish multiple properties.

Thanks to numerous television programmes an increasing number of people are now purchasing property to develop or refurbish with the intention of either renting it out or selling. It is this developing trend which will help regenerate inner city neighbourhoods and alleviate the UK's shortage of houses.

Property Development Finance offers the flexibility to obtain funds quickly, for example buying a run down property at auction and then providing the finance to carry out the refurbishment work. Usually refurbishment projects do not take long to complete, often the sales process can take longer than the refurbishment phase, for this reason having the right property development finance in place can help move on to the next project whilst selling the current one.

[tags]property development finance, property funding[/tags]