Bridging finance and development finance are two distinct product areas that require different skillsets to administer
The development finance sector continues to go from strength to strength and we are seeing more new entrants come to market. What is more, an increasing number of lenders are broadening their offerings, resulting in better rates and higher loan-to-values. This makes it a serious area of growth in the bridging sector.
That said, it is important to remember that bridging finance and development finance are two different product areas and bridging loans do not hold all the answers when it comes to offering a robust development product. In my experience, a good bridging lender does not necessarily make a good development lender.
United Trust Bank, for example, offers both bridging and development finance but has a separate team for each; it knows the skillsets differ. Yes, some aspects overlap and plenty of bridging lenders will offer the initial funds to acquire the property asset. Once a deal has got residential planning, most lenders will consider lending. However, a bridging lender that offers stage payments based on re-inspections, and lending based on LTV limits, is not usually adequate for a ‘serious’ property developer.
We would expect a serious development lender to employ a quantity surveyor as well as a Rics surveyor. We would also expect lending to be based on the cost to complete the project, rather than on the LTV limits. Both intermediaries and borrowers should therefore take a cautious approach to bridging lenders that offer development loans because they could come unstuck.
I have seen clients complete on a deal with a bridging lender that is offering stage payments and be able to purchase the site with absolutely no problems.
Next the client knocks down the house on the site and digs a large hole for new footings. The surveyor then goes out and reports back that the site has gone down in value.
The client may have spent £50,000 to £100,000 on demolition and clearance before even thinking about pouring the concrete or laying a brick. Then they go to the lender expecting a stage payment and get refused.
This type of scenario occurs frequently. I am not knocking all bridging lenders that offer development loans but am simply emphasising the difference between the two.
Of course, bridging plays an important role in development finance, especially if the site acquisition needs funding prior to planning being granted. Most development lenders will not touch a site before it is planned but bridging lenders will get involved and assist. The borrower then completes, gains planning permission and refinances on a development facility.
When offering development loans, bridging lenders can fall short on term. It is feasible to build a single unit or a pair of semi-detached properties and then market, sell or refinance it within 12 months – the maximum term most bridging lenders consider. However, it is unlikely that five or more houses will be built in 12 months, so a longer term is required, maybe double that.
Sometimes an even longer period is required for larger housing developments but these are usually phased in stages.
Although more movement is likely in the development finance market, it is still a specialist area and market knowledge is essential. The specialist sector has continued to grow because it offers a flexible approach to sourcing funding options that match the realities of the economic environment.
A tick-box mentality will not assist mortgage intermediaries in securing the required finance for their clients or the right term of the loan. It is therefore clear both bridging and development finance are vital segments in the housing market and the industry must continue to provide a wide range of flexible finance options.
Kit Thompson is director of bridging loans at Brightstar