Development Funding – Back to the drawing board?

Here our managing director David Rainford looks at development funding and the impact of Covid-19 over the previous few months.

The last five to six months have been a bit of rollercoaster in the residential development funding sector. Lenders pausing or pulling out of new schemes; developers opting to put new build starts on hold; introduction of CBILS support which, to be frank has been a bit of a damp squib from a property development perspective – I could go on.

Sourcing development funding and navigating the myriad of options, lenders and criteria was challenging at the best of times but following Covid the task has become even more difficult. Whilst the signs in the housing market seem to be broadly positive as we have emerged from lockdown with traffic to websites, estate agent enquires and indeed reservations and completions all pointing to a robust and seemingly upbeat buyer market, there remains an undercurrent of nervousness in the debt funding markets.

The consensus of opinion is that the changes to SDLT made by Chancellor were needed and are welcome.  However, as these measures are for a relatively short period until end of March 2021, which will also coincide with changes to Help to Buy, the concern is that the New Year may bring some chilly winds to the sector, as the true impacts of weaning the economy off furlough and on to unemployment and in turn on mortgage serviceability and availability are seen. Are we simply just kicking the can down the road and what we are seeing at present is more a combination of pent up demand and stalled transactions during lockdown as opposed to a sustainable re-bound ? And I won’t even mention Brexit!

The truth is none of us really know the answer at present. Will the Chancellor revisit Stamp Duty in March or listen to the calls across the sector, even before Covid, for the extension of current Help to Buy support ? It is too early to make a call and therein lies the problem for development funders. Do they simply go back to ‘business as normal’ or opt for a more cautious approach ? The latter seems to be the route most have taken which is translated into lower Loan to Values, concentrating on existing loan books / schemes in build and supporting the most bankable projects and developers with proven track records. Changes in lending criteria coupled with the fact that some funders e.g in the peer to peer market are still not open for new lending has meant that a number of developers have had to ‘go back to the drawing board’ on funding plans and in many cases start the funding search all over again with the consequent impacts on equity requirements and time.

It is perhaps also important for developers to think about their lending partners and how they have been supportive (or not) during the past few months. Let us not forget funders, like all businesses, have been challenged as a result of the pandemic and I would applaud those who have stuck in and kept the umbrella up when it was raining and maintained constructive dialogue with their customers. But the marketplace has changed and the sentiments of funders supporting proven developers also works in reverse – developers need also to be confident of the track record of their funder and the ability to deliver even it this does mean having to squeeze a bit more equity input or ‘go back to the drawing board’ themselves.