1. How are development lenders supporting developers during this time?

We mainly deal with alternative lenders, and the lenders have remained committed to the sector.

There have been some lenders who paused operations, this can be due to dealing with existing problem loans, and also having their own liquidity issues where funding lines have paused or dried up. This can be due to a number of factors, for example some lenders have over achieved in the months to April, and faced less pressure in risker environment. Some lenders had used funding lines and private lines of credit from corporates and other investors who had seen a lot of liquidity from their other sources disappear. Unused credit lines can be an easy source to recapitalise some of these institutions rather than crystallise losses in the equity markets.

However,  even where lenders have paused lending to solve problem loans, lenders have on the whole been supportive. In my opinion this is not a repeat of 2008-2010.

A look at the credit default swaps spreads globally, a measure of the perceived credit worthiness of the banks, show that while the confidence in lenders are not as strong as the heyday of the early and mid 2000’s, when the so called masters of the universe could do no wrong, the perceived cost to insure against defaults by the lenders had fallen considerably.

Looking closer to home, we can see that a number of the challenger Banks who serve the alternative finance market and specifically the Tier 1 equity ratio remain strong. This measure was introduced in 2014 as a precautionary measure, with the minimum level at the time of 4.50%

This strength is a blessing, while not true for every loan, lenders have been capable of absorbing increased capital costs of loans which are not performing.

2. Whatever support exists for developers?

We cannot mention support without mentioning the incredible level of support the government has made in every part of the economy. I do not envy the daily task of pushing out initiative after initiative, without the time to get feedback and to consider all angles. As our Chancellor has said on many occasions, this was a time for a blunt instruments in order to kick start and defend the economy.

In recent weeks we have seen a handful of brave and forward thinking development and bridging lenders try and get the Coronavirus Business Interruption Loan Scheme (“CBILS”) used to support the property industry. I am a big believer that an investment led solution is the right way to get the economy going. Without doubt ensuring that previous mothballed sites are up and running again can play a part.

SME developers tend to contract more of their team, and so a developer working on site will hire contractors, and sub contractors as well as professionals and dare I say brokers to help with managing a site from inception to completion.

“CBILS” loans for developers and investors seem to differ between different lenders. This is curious but I believe a reflection of the fact the original scheme was not set up for property projects, but crucially were never excluded from the type of the industries the government were prepared to support.

3. Is this a time for developers to be cautious?

I think developers are in three different camps. If you are committed to an existing deal perhaps where land value is high, profit margins are low and you face construction uncertainty and softening gross development values, you are relying on support. Whatever solution has been presented is often depended on your ability to extend the timeframe of the deal. For a lender preservation of loan covenants through management of the interest tranche is crucial. Buying yoursle time may involve resetting the interest tranche through a prepayment, asking for an increase in loan size and term, and or refinancing the loan.

The second group of developers have reached the conclusion of their project the challenge here is the ability to achieve sales, or refinance the loans.

The evolution of the rental market will also present problems where converting a build to sell scheme to a build to rental scheme will be harder where purpose built rental schemes have extra amenities which can be attractive to renters, which were perhaps not considered extras in a build to sell scheme. The availability of leveraged long term funding has also been impacted for block refinancing, with some lenders struggling to cope to find capacity to look at new deals.

For the third set of developers, opportunity and risk present itself in equal measure, and perhaps where Benjamin Franklin’s quote is most pertinent. They are not committed to any sites, but suddenly find themselves presented with many opportunities as defined by the last decade of market data. We find the most experienced developers consider these opportunities through the lens of an ever changing market, and consider the impact of second waves of the pandemic and also a protracted U shaped economic recovery.


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