With finance often quoted by housebuilders as a key constraint on development, PHPD spoke with Keith Forster of specialist brokers PF&D Limited for an insight in to the types and availability of finance for the small to medium sized housebuilder/developer.
Q. Why do you think access to finance remains a problem for many housebuilders and developers?
Since the ‘crash’ the small to medium-sized developer has found it difficult to secure the right blend of finance for their projects. The problem for the small to medium-sized business is that 90% of these lenders lie ‘below their radar’.
That is where we come in. PF&D has direct access to over 90 lenders. We fully analyse the proposal and check that it is a bankable proposition. We then determine what the client’s financial needs are around that project as this enables us to submit the proposal to the most appropriate lender(s). Put simply, we connect developers to lenders.
Q. With which lenders do you work?
Most of our lenders do not reside on the High Street; they comprise a mixture of Merchant Banks, Hedge Funds, Investment Groups, Private Lenders and so on. Without a High Street presence these lenders are hard to find. Indeed, these very lenders look to the likes of us to find them suitable housebuilders to lend to.
These funders have become very creative and there are some amazing products to help housebuilders grow their business. For example, products that enable housebuilders to use less of their available cash, and products that refinance completed units awaiting sale are extremely popular with our client base.
Q. In which areas of financing are you witnessing increasingly levels of interest?
An area where we are finding significant demand of late is for a finance product commonly referred to as ‘Stretched Equity’. Whereas normally a loan from, say, a High Street lender, is limited to say 65% of costs, there are several lenders we deal with who will readily lend 80%-90% of costs. It works by simply combining a blend of prime bank finance at a low rate with higher risk finance at a higher rate. The two rates are ‘blended’ together to form one average rate and lenders terms can be astonishingly competitive.
The major advantage to the housebuilder is that they can retain more of their cash to buy and develop other sites which, of course, should lead to much more profits than they could have made under the old 65% of costs loan facilities. We even have a handful of lenders who will finance 100% of all site and construction costs for the right scheme on a profit share basis.
Q. What about products that refinance completed developments awaiting sale?
This is called Exit Finance and is relatively new to the market place. It was specifically designed to enable the housebuilder / property developer to refinance unsold stock, to either raise cash or repay an existing development loan that has perhaps come to the end of its term.
Exit finance is quite competitive and offers terms of up to 18 months, which buys housebuilders the time to sell their stock at the right price rather than having to heavily discount prices to extricate themselves from the project. Some development loans carry high rates of interest and so housebuilders / developers can often benefit immediately from re-financing their stock and save on finance costs.