Developers urged to purchase materials in advance, especially for ground-up schemes

On Wednesday 17th March, Development Finance Today partnered with Roma Finance for a live discussion of the heavy refurb and ground-up development finance markets.

Caron Schreuder, managing director at Medianett, hosted the session, along with Roma’s managing director, Scott Marshall, and senior underwriter, Samantha Williamson.

The broker panel comprised Kim McGinley, managing director at VIBE Finance; Laura Toke, associate for short term finance at SPF Private Clients; Dave Pinnington, director at Finance 4 Business; and Piotr Twaits, sales director at Synergy Commercial Finance. 

The speakers were extremely positive about developer activity and prospects within these parts of the sector, acknowledging how far we have come compared with a year ago.  

Samantha emphasised how differently heavy refurb and ground-up development projects were assessed in contrast to a standard bridging loan. 

“The main thing to get across about these types of products is that they are very bespoke,” she said. 

“It’s more about understanding the people that you’re dealing with, the professional team they’ve got around them and what sort of experience they have.” 

She added that the increased due diligence that goes into underwriting these facilities involves analysing whether the terms and budgets are reasonable and factoring in “wriggle room” for delays or cost overruns, as well as considering the all-important exit strategy and more intricate valuations.  

“There’s so much more involved from the broker’s perspective when compared to a straightforward bridging transaction,” Laura claimed, including additional support, site visits, cost analysis and being knowledgeable about the end demand for the project — which is integral to a lender’s willingness to fund it.  

With regard to supply chain issues brought about as a result of national lockdown restrictions and Brexit, she advised that contingencies would depend on the deal at hand.  

“If we’re looking at a heavy refurb [such as a commercial-to-residential conversion], you may be able to get away with getting the materials from the UK, especially if your build costs aren’t super high.

“But, on a ground-up development project, you are probably going to need to source your materials from Europe, otherwise it is going to eat too much into your profit margin.” 

To account for this, Laura recommended that materials are purchased as far in advance as possible and highlighted that lenders are more routinely understanding that longer terms may be necessary.   

While Piotr believes that the alternative funding market has “woken up” in terms of appetite for heavy refurb and ground-up finance when compared to the status at the height of the pandemic, understanding the client and managing their expectations when it comes to the complexities of securing finance still needs to be focused on.  

He also urged senior lenders to maintain healthy loan ratios, noting that mezzanine providers are becoming uneasy about the size of the gap that is needed to be filled with junior debt.  

The retraction of the high street from this sector has resulted in niche lenders like Roma being able to snap up highly experienced, well-trained talent, Scott commented.   

“Often, they have not been given the responsibility [to] make deals happen,” he expanded, adding that, in some cases, people hired from this sort of background have been frustrated at not being able to back projects or opportunities which they believed in.  

According to Scott, in becoming bigger cogs in a smaller wheel, everybody benefits; the recruits, who have broadened their career opportunities, and the customer, who is brought closer to better, faster decision making.  

He went on to confirm that development projects require the lender, broker and customer to form a deep, trusted partnership, sometimes over a two-year period.

Failure to do so “can destroy value for everybody.” 

He highlighted the importance of choosing the right lender, noting that borrowers need to be sure that the finance provider they work with will be supportive throughout the life of the loan, even  when something goes wrong.

“As a broker, our job is to protect the lender as much as the client,”  Dave stated, pointing out that part of the job is finding out whether the client needs leverage, speed or one of a host of other variables, and sourcing the finance accordingly.  

Laura concurred that a broker should be aware of current provider appetite and which are best suited to certain schemes. “If you’ve got a less experienced borrower who maybe hasn’t had three or four ground-up projects under their belt, that is going to be more difficult to place.”  

In a market where exits are impacted by longer sales periods and there are difficulties with refinancing and reduced mortgage LTVs, the broker needs to not only match the correct lender and developer correctly, but also ensure that they can repay.  

When discussing the common pitfalls experienced when placing applications for heavy refurb or ground-up cases, Kim detailed that, even before selecting a lender, it is imperative for brokers to address the cost of works, making sure that contingencies and professional fees are included — something she says is often surprisingly missed. 

“Property CVs go a really long way,” she commented. “It gives a great background into what they’ve been doing.”  

She added that VIBE tries to educate its developer clients to get their ducks in a row  in order to make a positive first impression.  

On the subject of repurposing our high streets and the surge in PD and conversions  experienced by the panel, Dave suggested that department stores in prime locations may seek to restructure their layouts. 

“…What they’re looking at now is [having] three floors of retail space, a floor of leisure and three floors of accommodation.”

He explained that a full retail unit that occupies a prime city centre location, such as Birmingham, will still retain its retail footfall, but doesn’t require its original sq ft.

The full video can be watched, below.

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