Developer exit finance is one way to stay active in a static market
In the not-too-distant future, if you believe some, we will all be looting shops and scavenging, simply to survive. The streets of the UK, come 29 March or whenever Brexit happens, will be like a scene out of Mad Max.
In reality, of course, none of this will happen. Yes, things are uncertain and there is potentially a lot of turbulence to come, but conditions in 2019 are nowhere near as bad as 2009. Back then, things really were on a knife edge.
Nevertheless, brokers, like people in most other sectors, will already be feeling the heat of Brexit, or whatever it is we end up with – especially those in London and the South East, where Brexit paralysis is at its most extreme.
The slowdown in property transactions as customers play it safe is one of the standout effects of current political uncertainty. But many brokers active in the bridging and specialist finance sector are turning that to their advantage through developer exit finance.
Without a doubt, developer exit finance has been one of the strongest growth areas in the industry over the past 12 months.
With units taking longer to shift, the extra time and reduced cost developer exit loans offer is proving a real lifeline to developers. Here is an example of how these loans work in practice.
A borrower has 10 unfinished properties in Kent with a gross development value of £10m and only six weeks left on their existing development facility. They want three things: to provide the final funds to complete the scheme; to allow more time to market and sell the remaining properties; and to release equity and profit out of the site before practical completion. Importantly, these funds will be used to pay the deposit on another one secured and so cannot be used as security.
This is clearly far from being a vanilla loan, but the borrower is a prolific developer with an amazing track record, and the individuals involved all have good credit profiles and are personally invested in the deal.
Second, the borrower has already completed the sales of two out of the 10 properties, with a further two already exchanged. This provides reassurance in terms of liquidity.
Third, with four properties already sold and interest in a few others, the units are clearly priced correctly for the area and would sell within the 12-month term provided. Because of all of this, a loan facility could be provided at 70 per cent of the remaining GDV.
This loan allows for a £500k equity release from the refinance of the borrower’s development facility, providing the vital cashflow required on the other schemes. It can also be structured to release further profits from each additional sale on a pro rata basis.
This is just one example. Another is a situation where a former public house has been converted to six residential flats with a market value of £2m.
A total of £1.25m is given to the developer at 70 per cent LTV, not only to redeem their existing development facility but to also purchase another building for development, on which their offer has been agreed.
When we dealt with this exact situation, there was a small hitch to the existing development in that building control had a minor issue with one of the flats, which meant the developer could not sell the two flats they already had under offer. But this was not a material obstacle, and 99 per cent of the development was complete.
As part of the facility, it was also agreed to release 20 per cent of the sales proceeds of the first two properties when they had sold to provide the developer with additional cash flow.
Opportunity for brokers
The message is that a market in stasis can still be an opportunity for brokers to earn, in this case through developer exit loans.
So if you are not doing so already, you should be speaking to any of your developer clients about this route now.
In a market with Brexit hovering over it, it’s a genuine value-add for them and a revenue generator for you.
Jonathan Samuels is chief executive at Octane Capital