“Above all, at the heart of any good deal are robust relationships between lenders, brokers and developers, rooted in trust and transparency.”
As we head into spring, there are a number of green shoots of growth appearing in the development finance market. There has been a decrease in both inflation and mortgage rates, as well as a levelling out of building costs. New opportunities for SME developers continue to emerge – therefore this presents a window for development finance brokers and lenders to capitalise on these signs of growth by adopting a transparent and collaborative approach to deal making.
Transparency is key
Above all, at the heart of any good deal are robust relationships between lenders, brokers and developers, rooted in trust and transparency. The property market has weathered a number of storms following the disastrous mini-budget, but going back to the basics of what makes a good deal is critical to getting projects off the ground. The way we approach this at Atelier is by looking at the spine of the deal. We have a number of categories and considerations that make up the key criteria for a deal, including the presence of a liquid but robust local market; the right product in the right location; sensible build costs; a Personal or Corporate Guarantee with appropriate financial strength; and a borrower with a successful track record of similar developments.
Clarity and consistency are essential throughout the dealmaking process all the way through to project finish to ensure deals can weather challenging market conditions. Lenders should be prepared to be open about the elements that make or break a deal. For example, we are explicit that Location is something that remains a key priority, but the construction costs and procurement processes are also large considerations when assessing the spine of that deal.
Where brokers can add real value, is spelling out why the development makes a promising financial investment in the context of the local market, it demonstrates a reciprocated transparency between the broker and the lender. By way of example, providing confidence in comparable sales which prove the development can be sold or rented at forecast level, remains important. The addition of Personal Guarantee or Corporate Guarantee demonstrates ‘skin in the game’ and remains an important factor in contributing to lender confidence. Another important consideration is being realistic about the length of time it will take to sell the number of units in question, and ensuring the suggested length of loan is in accordance with this.
A question of reciprocity
To gain the most from any engagement, the transparency must flow both ways. Lenders, and in particular alternative lenders, have flexibilities when it comes to financing, and this can provide additional opportunities for brokers. By having trust and transparency surrounding potential outcomes and challenges, it provides a way in which both sides remain fully informed and in the loop, throughout the life cycle of the loan. In practice, this means brokers and developers raising the flag at the first signs of a project not being on track to complete within budget and deadline. Getting all parties around the table as soon as construction costs overrun or deadlines are missed is vital to protect the viability of the project and mitigate long-term repercussions. Managing client expectations and ensuring these are realistic from the offset is also fundamental to the success of a deal.
Looking ahead
Given the recent green shoots within the housing market, we are seeing an increase in the number of viable schemes which work for developer and lender alike, so there will be plentiful opportunities in the residential development finance market in 2024.
To get the most out of funders in this market, brokers will benefit from working with lenders who are transparent, and who offer clarity, certainty and speed in their financing decisions. Developers and lenders who offer reciprocal transparency and communication, by demonstrating experience and reassurance against the financial viability of the product in the right location, will be put in the best stead for success.