Bridging the gap to greater diversity in housebuilding

Bridging lenders have shown in the past that they have been prepared to adapt the use of their financing. During this decade, their popularity has grown immeasurably, providing £3.5bn to property professionals (including developers) for small projects.

But now the game has changed again. SME property developers’ contribution to housebuilding was acknowledged by the government in the housing white paper earlier this year when Sajid Javid said he wanted to create greater diversity among firms building homes.

The communities secretary wants to dilute the dominance of the 10 largest builders, responsible for supplying 60% of the UK’s private homes, by offering public sector partnerships to small- and medium-sized developers.

Support for SME finance also featured in the housing white paper, which came with a pledge to work with the British Business Bank to encourage current and potential lenders and investors to invest in SMEs.

But still, SME property developments remain woefully underfunded. It’s great that government is doing its bit to support SMEs but unfortunately many development finance providers are not as willing to share in the risks of the early stages of small projects, leaving SMEs struggling to obtain money to acquire land and kickstart the build.

De Montfort University’s latest commercial property lending report found that just 20% of development finance lenders were interested in lending on projects under £10m, whereas research carried out by Knight Frank for its 2016-17 residential developer survey showed that 62% of developers were looking for minimum development funding of between £1m and £10m. A further 16% wanted to finance smaller projects of up to £1m.

With less than a quarter of the market willing to lend under £10m, traditional development financing is failing to provide support for a large number of residential development projects.

This mismatch of supply and demand is something we at West One want to address

This is a clear mismatch of supply and demand and something we at West One want to address.

We’ve been supplying bridging finance since 2007 and to date we have lent more than £2.5bn spread over many thousands of loans.

Due to the short-term nature of bridging loans, typically six to 12 months, and the way in which assets are valued for security using current rather than future built-out land values, bridging is a good fit for property development.

For this reason, it’s certainly no surprise to us that around 85% of our clients are property professionals whose primary source of income is derived in some way from property, whether that be refurbishment, development or property trading.

Doing more to help SMEs

We understand property, and we have supported thousands of developers in their endeavours, but we think we can still do more to help SMEs fund their development projects.

We started by taking a look at the biggest challenges facing SME developers in today’s market and then explored how bridging and development finance can work hand in hand to solve these problems and allow developers to transition from one form of finance to the other, without changing lenders.

So what challenges are property professionals facing?

Properties are selling, but not as quickly as they were. This may result in developers holding more stock than they would like, which could slow down their plans to make further acquisitions from a cashflow perspective. Developers are also struggling to find good financing packages that can bend to suit their project requirements.

Planning permission is also an issue when applying for finance. Many developers look to acquire a site that doesn’t yet have planning permission because those that come with existing consent are often expensive. Some may want to purchase a commercial property to carry out a permitted development conversion while others could be splitting the land title and applying for planning consent on part of the land. It may be that they need to make alterations to a property first before a development finance lender will agree the loan.

However, without planning they will struggle to secure development finance, which means they are unable to acquire the site in order to obtain permission. It’s a vicious circle.

A bridging lender, on the other hand, will advance a loan to allow the developer to acquire the property or land pre-planning. Quite often as a firm we lend against land. We allow developers to borrow against the existing value of the land or property, rather than gross development value (GDV).

We provide the funds for the acquisition, then the developer will refinance the deal with development finance from another lender once the necessary planning permissions have been granted on the land.

Once the development has completed, the client refinances back to West One while they sell the units. We share the sales risk and give them the extra breathing space they need to sell their properties.

The development finance loan may have an 18-month term, but it could easily take the developer 15 months to complete their project, leaving them just three months to market and sell the units before the loan is called in. We will refinance the client back to us on to a short-term mortgage with no early repayment charges, buying them more time.

For years, we have been facilitating the beginning and end of the developer’s journey, so it makes sense for us to step in and offer the middle part of this process as well

For years, we have been facilitating the beginning and end of the developer’s journey, but not the middle. We’re proud of the service we offer our clients at West One; we want to offer them the smoothest service possible so it makes sense for us to step in and offer the middle part of this process as well.

In quarter one next year, West One will launch its development finance proposition to SMEs across the UK looking for loans up to £7.5m.

By doing this it will give the developer more certainty that they will be able to obtain development finance. They know they are with a lender that understands and supports their needs and requirements, because we have been with the deal from day one. Once planning has been approved, we would look to switch the loan from a bridge to a GDV-based funding facility.

Of course, not all SME developers may need to transition from bridging to development finance and may need purely one standalone bridge on a short-term project. For example, run-down or derelict properties are generally unmortgageable, but developers can obtain a bridging loan to help pay for the purchase and conversion costs. This is then repaid by remortgaging to a mainstream lender that would repay the bridging facility.

Our new hybrid service will not only provide a smoother journey; it will give developers more time to concentrate on sales. We have different products within our firm that the developer can switch to if it needs more time to dispose of the properties.

We think that by plugging this gap in our suite of products we will be better equipping SME developers to overcome the challenges they face in the current marketplace.

It’s important that we remember the valuable contribution made by small builders and independent property firms in the provision of unique builds and character-led conversions and, as an industry, get behind the government’s vision of greater diversity in housebuilding. 

Stephen Wasserman is managing director of West One Loans