According to the latest Rightmove House Price Index for May 2011, the UK property Market is remaining in a state of limbo. A lack of proceedable buyers is not helping, and a it would appear that most new sellers are marketing under forced sale conditions, sometimes holding out for unrealistic asking prices. Although there is also conflicting data from other sources.

London property prices buck the trend.

Some London based agents are reporting that the average price of a house in North London is now £367,594 – around 1.2% higher compared to last year. The average price of a house in South London is £305,249, which is an annual increase of only 0.2%.

According to the latest Chesterton Humberts/cebr APRIL 2011 House Price Poll of Polls, this makes North London house prices £62,345 more expensive on average compared to South London. The gulf between the two areas has continued to widen, from last years’ gap of £58,595.

Whereas the latest data from the Communities and Local Government department show UK house prices fell slightly in the first three months of the year.

Apparently From January through to the end of March this year house prices were 0.5% lower than for the previous three months.

Gross mortgage lending tumbled by 14% in April to an estimated £9.8 billion, according to the Council of Mortgage Lenders.

Interest Rates are not the only factor

According to research by the Halifax many homeowners may have benefitted from low interest rates, but they are currently facing their highest household costs for three years.

They say that Over the past year, the average annual cost associated with owning and running a home rose by 1.4% (£127) from £8956 in March 2010 to £9083 in March 2011.

So once again there are conflicting news items about property prices, and it’s not all bad news all of the time. This has to be good news for property developers.

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Read more about this subject here: Property prices ups and downs, again.

According to the latest Rightmove House Price Index for May 2011, the UK property Market is remaining in a state of limbo. A lack of proceedable buyers is not helping, and a it would appear that most new sellers are marketing under forced sale conditions, sometimes holding out for unrealistic asking prices. Although there is also conflicting data from other sources.

London property prices buck the trend.

Some London based agents are reporting that the average price of a house in North London is now £367,594 – around 1.2% higher compared to last year. The average price of a house in South London is £305,249, which is an annual increase of only 0.2%.

According to the latest Chesterton Humberts/cebr APRIL 2011 House Price Poll of Polls, this makes North London house prices £62,345 more expensive on average compared to South London. The gulf between the two areas has continued to widen, from last years’ gap of £58,595.

Whereas the latest data from the Communities and Local Government department show UK house prices fell slightly in the first three months of the year.

Apparently From January through to the end of March this year house prices were 0.5% lower than for the previous three months.

Gross mortgage lending tumbled by 14% in April to an estimated £9.8 billion, according to the Council of Mortgage Lenders.

Interest Rates are not the only factor

According to research by the Halifax many homeowners may have benefitted from low interest rates, but they are currently facing their highest household costs for three years.

They say that Over the past year, the average annual cost associated with owning and running a home rose by 1.4% (£127) from £8956 in March 2010 to £9083 in March 2011.

So once again there are conflicting news items about property prices, and it’s not all bad news all of the time. This has to be good news for property developers.

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Read more about this subject here: Property prices ups and downs, again.

Property Development Finance is a form of financing particularly for developers of commercial and residential building  projects.

Property development deals can consist of an assortment of short and long-term elements, including equity and mezzanine finance, plus standard bank debt.  These kinds of loans have lower perceived risks for lenders because they know their customers and will recover their money when the development sells or is re-mortgaged.  Property development finance is usually a short term type of financing that may be for between 18 to 24 months.

When looking to take out property development finance the most important point to remember is that the rates of interest can vary considerably.  Factors which are taken into account when setting the interest rate will include your experience in property development and general credit worthiness. Rates will be based mostly on the industry sector at the time and the strength of the proposal you are putting forward.  A broker can help you to get the cheapest rate of interest and the best deal when it comes to property development finance funding.

If you’re just starting out, banks will most likely require a higher level of security.  This means you have to put more of your own funds into the development.  However a broker is more likely to be able to negotiate this for you particularly if you have a proven track record and background in another sector.

There are varying levels of property development finance available but simply put, you can borrow up to 100% of the purchase price & 100% of the development costs.  High street banks normally only grant 50/50 funding (50% for the acquisition and 50% for the building).
Bridging finance is another tool for the developer to use, particularly useful if property development finance can not be raised because of planning problems.

A commercial mortgage broker is more likely to have a greater knowledge of the complex options involved with property development finance and have better access to the marketplace.

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Read more about this subject here: A Quick Refresher on Property Development Finance

Looks like the doom and gloom merchants are out in force again.  But who should property developers believe? We take a look at some of the property press over the last week for hints as to where the property development finance opportunities may be hiding.

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.

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Read more about this subject here: Property Development Finance in amongst Predictions of doom for property prices

A property developer has won a High Court case against property investors forcing one to pay £133,000 after they backed out of an agreement to purchase flats “off plan”.

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.

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Read more about this subject here: Property Developer Wins Test Case Against Investors

We thought that Mezzanine finance in the property industry had all but disappeared.  Two or Three years ago there were plenty of options with Mezzanine finance with lenders keen compete with each other.

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!

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Read more about this subject here: Mezzanine Loans for Commercial Property Development

There are increasing signs of improvement in the property market, but does this mean that property developers will be able to get 100% funding again any time soon?

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.

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Read more about this subject here: Property Development Finance – who is lending?

Mezzanine finance is the funding that makes up the difference between the level of bank funding and the actual project cost.  Mezzanine deals can sometimes enable a property developer to take on a project which they might otherwise not be able to finance.

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.

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Read more about this subject here: What is Mezzanine Finance

Bridging loans can be used for almost any purpose so long as there is enough equity in the property.  The UK Bridging Loan market is estimated to be worth £2.5 billion and the demand for bridging loans is believed to be growing by 25% year on year.  Bridging finance can be made available for many purposes, the obvious one being to bridge the gap between the purchase of a new property and the sale of an existing property.

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!

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Read more about this subject here: Bridging Loans Explained

Some people regard 100% property development finance as the holy grail of property funding.  So it is not surprising that it is one of the most often requested types of loan.  We should say right at the outset that 100% development finance is possible, however there are several important criteria that a lender will look for.

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]

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Read more about this subject here: 100% Property Development Finance