When sales are slow due to lower-than-expected buyer demand, housebuilders and developers can easily be left in a bind. Typically, they will have bought the land, paid the build costs and been servicing a development loan agreed at the start. All going well on the sales side, the loan is repaid leaving ample scope for profit, but in tough market conditions, the plan may not work in practice. Here, Ben Arnold, Head of Property Services at MSP Capital, explains why a development exit bridge loan can help.
Economic challenges have led to build cost increases and a much slower sales market for many SME and regional housebuilders, and their national counterparts, in recent times. The tough conditions have seen examples of builders and developers being left with unsold stock on a just-completed project when they wish to move on to their next one. As a result, they may come under pressure from banks and other lenders to repay or refinance their original development loan to enable payback in line with their original loan term.
“If a bank won’t extend terms, this can have serious consequences for cashflow, especially for SMEs whose pockets are not so deep as the national players,” says Ben, who has recently joined lender MSP Capital after eight years as Land and Planning Director at Hampshire and Dorset developer Pennyfarthing Homes.
“A borrower in that position may experience cash flow issues and not be able to pay business overheads such as staff and contractor costs. It will all get extremely pressured if the bank’s remedy is to move the borrower onto a default penalty rate or, in the worst-case scenario, appoint an LPA receiver. Ben points to a number of reasons why a development exit bridge deal can be an attractive option to avoid such a situation. “It is a loan specifically designed to enable a borrower to leverage money out of their newly completed development so they can recycle their cash equity to move on to the next project,” he explains. “Many lenders do not offer development exit finance and so you need a more flexible lender who understands the property market and new homes.” Ben, a Chartered Surveyor with career experience as a director in the Savills’ south coast development team, says a key benefit of an exit bridge is the lower interest rate and higher loan to value (LTV) generally involved. “It’s lower risk for the lender compared to a development loan because the houses are already built and on the market, and will be sold when a buyer comes along. The rate applied will therefore tend to be lower, perhaps a couple of per cent lower depending on the borrower profile. Also, there is scope for a higher LTV with a lender such as MSP Capital who is specifically set up for guaranteeing a swift turnaround on deal applications while doing all the due diligence required. We have just announced a new pricing strategy which enables developers to access bridging deals from just 0.75% per month up to 75% LTV and terms of up to 36 months. The appeal for the developer with this kind of exit deal is that they can bridge out their profit and go on to their next project or projects confident that the loan will be repaid during its term. It’s ideal for those developers who have contractual obligations to fund new land acquisitions.”
Asked what borrowers need to keep in mind when considering an exit bridge, Ben says: “The homes in the development need to have been completed and signed off as complete with building regulation approvals, warranties and planning condition requirements. If we’re talking about flats in a block, the whole block must have been signed off.”
And to underscore the main benefits, he adds: “A development exit bridge is an ideal solution for those housebuilders and developers stuck with completed stock they can’t immediately sell. The lower rates compared to the original development loan mean you can borrow the money more cost effectively while potentially leveraging more equity in the development. Because sales have been slow in the market in recent times, we expect to see rising demand for exit bridge finance in line with growing awareness of it as a solution.”
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