The relaxation of permitted development and increased availability of commercial property ripe for residential conversion are already delivering new opportunities to developers’ doors, but the pandemic is also creating hurdles.
The delays caused by multiple national lockdowns have made it much harder to complete a scheme within an anticipated timeframe and budget. Construction sites need to be managed more carefully to allow for social distancing guidelines and it’s tougher to get hold of materials.
Consequently, many developers are finding that their working capital is tied up in existing projects for longer and this is reducing their ability to take advantage of new opportunities. So, what are their options?
One way for developers to make the most of their available capital is to look for ways to achieve greater leverage.
Typically, when it comes to development finance, a high street lender might only lend to 50% of the Gross Development Value (GDV) – and for developers who might have capital tied up in other schemes, this is often not enough. The next option is to look to the specialist market, where lenders can often provide up to 65% GDV, equivalent to 75% or 80% of total development cost.
But what about developers who want to borrow a bit more? This is where the options can become more complex. On larger schemes, typically over £10m, one option would be mezzanine finance – an additional loan that enables a developer to increase their borrowing. With the additional loan, however, there are additional costs. A developer will often have to pay for another valuation, solicitor and monitoring surveyor, and the process can become quite complicated to manage. More involved still, and often more expensive, there are options where a developer could secure funding for a project in exchange for a share of the eventual value realised by the scheme – known as equity funding.
However, there are more streamlined and straightforward ways in which experienced developers can achieve greater leverage on smaller schemes without the involvement of a second lender.
For example, at Alternative Bridging Corporation, we have recently launched Development 90, which provides 90% of project cost and 75% of GDV for new build schemes, conversions and refurbishment projects. It’s available on loan sizes between £500k and £3.0m, on terms up to 24 months, and includes
transparent fees and pricing. It’s a product innovation that is designed to help developers get over the hurdles they face and to open new doors to access the ongoing opportunities in property investment.
