Last week, DFT partnered with International Hospitality Media to chair the latest live event in the Urban Living webinar series to discuss the unknown GDV and its impact on funding new development projects.
Beth Fisher, editor at Development Finance Today, asked the panel whether they were witnessing LTGDVs being capped and what options developers had if this was the case.
Emma Burke, deal origination at Maslow Capital (featured in the video, above), said that the development lender looks at each opportunity on its own merits.
“No two developments are the same in terms of location [and] end unit values,” she added.
She explained that trying to get a development to fit into a product “doesn’t generally work”.
“Admittedly, we are not at the top of the LTGDV curve and I think that being at 70% or above at the moment, unless of course it's massively de-risked through pre-sales etc, is not a good place to be.”
She pointed out that this was from both the lender and borrower’s perspective — while we are currently dealing with the effects of Covid-19, we still have Brexit rearing its head in the background.
As a result, it’s possible for developers to have delays with the supply of materials and labour.
Emma also noted that if there was a case of Covid onsite, it may be closed for two weeks.
“So, being at 70% doesn't give you any leeway to offer the additional support to the client as you progress through the development.”
She added that while between 55 and 65% was a more “sensible” place to be, it obviously presents issues with leverage.
To help, Maslow has ensured it is up to speed on mezzanine finance and equity options and understands where their appetite and pricing is at.
Emma explains that mezzanine finance was born during the GFC when there was a lack of liquidity.
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She supposes mezzanine is still seen as a lengthy process, with senior debt the go-to choice — "but [that’s] not the option anymore," she said.
“I think what you'll find is [that] the mezz lenders that are currently in the market and lending know development finance, so the process needn't be as difficult as it once was."
Andrew Hosford, managing director at Pure Structured Finance, commented that the “rebirth of the traditional mezz lender” is helping the brokerage get the level of LTV that the client needs.
“It remains to be seen whether that's sensible long term, because we don't know what they're going to sell for, obviously — who knows how long this is going to go on for.
“If we get a second lockdown [or] restrictions are put in place, what does that do for the timescale of the development?”
He mentions a client he currently has who is getting ready to go onsite, but doesn't want to start if he's going to have to lock up the site again, and is therefore hesitant to draw down a loan.
"...If that rolls on and he needs extensions on it, all of a sudden any profit in it in 12-18 months time is gone.
“That being said, to try and be [more positive], it does create opportunity for the mezz and equity guys, providing that the scheme is right.”
Attendees of the webinar learnt about how construction has been affected during the crisis; the impact that dislocation of supply and demand has had on valuations; criteria for refinancing; and risk management going forward.
It also delved into the concerns of developers who need to refinance now amid a tightening of LTGDVs, how value can be protected or enhanced for those who are currently in the middle of schemes, and whether government-backed boosts to the market, such as the SDLT holiday, could distance us even further from genuine market transaction data.
The panellists also included Russell Kett, chairman at HVS, London, and Patrick Smith, investment director at Frogmore.
The full video of the event can be viewed, below.