The comment was made after Shawbrook recently announced its intention to enter the VAT funding space.
On the other hand, another broker highlighted that several challenger banks already offered a VAT product, with experts predicting the market would see continued growth.
Development Finance Today has looked at why this space could be appealing to development finance lenders and the potential expansion of the market.
Why is the VAT funding market attractive?
“This market is attractive because there is very little competition, so new lenders will be able to charge high rates relative to other types of lending,” said Mark Homer, co-founder of Progressive Property.
“Some developers are in need of such products because of the demands on their cash flow.
“In addition, many have to fund payments to contractors and other suppliers for around three months before receiving a VAT refund from HMRC.”
Chris Oatway, owner and director at LDNfinance, added: “It is surprising that there have not been more lenders who have introduced a VAT funding product to the market, but it won’t be long before it is a regular add-on that the lenders will offer.
“For some developers pushing the limits of their funding, the ability to have assistance with VAT at acquisition could be the difference between the deal proceeding or not.”
Vincent Bull, managing director at VATBRIDGE, believed that more development funders would follow in the footsteps of Shawbrook as there was a perceived need for more supply.
“I think the perception [is] that this is risk-free, easy lending, but that is not the case.
“There are many ways that deals can go awry and – in my opinion – smaller, focused lenders are able to concentrate on a single product offering and deliver a quality experience moving quickly when required.
“If the VAT element is just another add-on to a main funding product, there is the danger that it will be treated as such.
“There is also the issue of how the overall LTV will be affected and how this may impact on the main lend.”
Nick Holding-Parsons, asset finance adviser at Arc & Co, added: “…We are already seeing several quality challenger banks provide a VAT product.
- Shawbrook to launch VAT loan product to support developers
- Specialist funders seen as enablers to the whole transaction
- Our sector seems to be largely ignored by the powers that be
“While I see a number of uses for bridging VAT in this sector, I believe there are three standout benefits that make it attractive.
“First, the VAT product releases cash otherwise tied up with HMRC.
“This enhances deal capacity by using the advanced funds to exchange on additional acquisitions.
“Second, the funding gaps are becoming increasingly common due to down-valuations and LTV caps,” Nick claimed.
“…Lastly, the advanced funds can be deployed immediately into developments, accelerating the project timescales.”
Alan Smith, managing director at Bridging Vat, claimed that it was fair to say that most lenders already had a presence in the market.
“First charge lenders – and particularly the high street lenders – have always been a source of funding for VAT on commercial property purchases.
“It’s just historically they haven’t publicised the availability of funding.
“It’s not available across the board and they certainly haven’t promoted it as a standalone product, for them it is just accommodation business.
“I see Shawbrook’s recent announcement as formalisation of the trend of offering a facility in support of their own first charge lending.”
Stephen Burns of Adapt Finance said that the facilities it saw were basically underwritten on the basis that full control was firmly with the lender, with the third-party debtor being HMRC.
“It’s expensive and pushes the LTV in many lenders’ eyes, so they’ve stayed away.
“As it is refunded, the LTV uplift is temporary, so more lenders are taking the time to understand the process, which will hopefully make the process easier in the long term.”
Holly Andrews, managing director at KIS Finance, said that while VAT bridging was still a relatively specialist area, it looked likely that we would see continued growth with more new entrants into the market.
“The general bridging sector has dramatically increased in size over the last 20 years, from a relatively small niche market to a mainstream form of finance, driven by demand for short-term, fast-lending options,” Holly claimed.
“In the same way, as demand for VAT bridging grows, the market will expand to meet this need.
“Commercial property development is a clear growth sector, driven by current low interest rates and market demand.
“Developers seeking to maximise their cash flow may choose to utilise the option of VAT bridging to avoid unnecessarily tying up their capital, allowing them to take full advantage of any new development opportunities that present themselves.”