A relationship with a lender that is limited to a basic understanding of their criteria is no longer enough when navigating a complex lending market. A deep knowledge of the lender you're working with is essential, including its source of capital, track record, level of reliability and whether its current position in the market is likely to adapt based on short-term market changes. Lenders are having to adapt to the changing market and their source of funds can be a key differentiator in the direction they take.
As lenders review their loan books, some are forced to take a more aggressive stance when seeking to regain the capital which they have deployed. New arrangement fees and default interest, while also requesting that interest is serviced, are some of the many changes which some lenders are implementing. Simultaneously, term lengths of development facilities will have to increase due to time off-site, a lack of availability of materials, a slower than usual supply chain and increased sales periods — this creates an imbalance in the needs of borrowers and lenders. Only those who work in tandem with one another will have a chance of coming out of this period relatively unscathed.
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This imbalance will create an opportunity for lenders who continue to embody reliability and put partnerships first. There are a significant number of lenders who offer development exit products, essentially a post-completion bridging facility. Once a development reaches practical completion, the borrower can exit their development facility and transfer onto a development exit product. This may be helpful given the potential imbalance discussed, but also has wider benefits. The products offers significant flexibility by allowing developers to let out units within the scheme, while also allowing the borrower to release equity from the start of sales, ie the sale of the first unit. Where values are deemed to have changed since the initial drawdown of a development facility, this also offers an opportunity to re-balance and borrow a higher level of leverage, dependent on your lender's current exposure.
Overall, we expect the significant cash flow benefits of the development exit product, coupled with lenders’ need to keep their funding lines flowing, to create the opportunity for development exit providers to help developers through the Covid-19 fallout, while fostering new partnerships for the future.
We are already advising a number of our developer clients in starting early conversations with existing lenders and exploring development exit facilities. Switching to this product gives our clients an enhanced ability to wait for the right offers on the units being sold. Many developers which GLPG work with have emphasised that these products and the enhanced cash release benefits will allow them to take themselves out of what could have been an inevitably distressing situation, or even take advantage of other distressed situations.