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In the second instalment of our look at development finance, David Alcock, MD at lender Blend discusses why now is a time to ‘Know Your Lender’ and work with one who understands the challenges while recognising the opportunities.
SME housebuilders face a tough battle ahead. High land prices and the ongoing construction materials cost inflation means making profit margins work on open market consented sites challenging, and developers and funders alike are navigating how to make deals work.
The events of the past three years have tested the resilience of SME housebuilders like few other sectors. An unfortunate combo of Covid-19 pandemic, site lockdowns and project delays, record planning delays and unprecedented construction materials cost inflation were followed by a slowdown in the private sales market and higher financing costs in the wake of last September’s mini budget debacle. From estate agents to surveyors, many stakeholders in the housing market have been impacted, but it is SME housebuilders who by far have had to bear the biggest cost of this roller coaster of events.
Profitability
The ever-present issue remains the profitability of sites, or indeed the lack of it in the current climate. My conversations with SME housebuilders reveal their main pain point: land prices and materials cost. On the former, land prices are still too high and have failed to adjust to the changing economic climate. As a result, profit margins on open market consented sites remain depressed, and SME housebuilders and development funders alike are simply unable to make deals stack up in this new environment.
On the latter, as build costs have risen so steeply over the past 18 months or so and interest rates have followed suit, deals that priced off appraisals from several months ago simply no longer work. Both those factors have sadly torn through the profitability of many residential development schemes. Overall, the housebuilders I speak to tell me that knowing when to sell and when to buy are the two largest challenges they face.
Reflecting these challenges, 33% of respondents to Knight Frank’s latest survey of housebuilders across the UK said that material costs and availability was the key challenge the sector faced in Q4 last year whilst 27% selected availability of land as the key challenge.
Specialists
As specialist development finance lenders, something we have witnessed over the past few months is developers being very keen to build new relationships with lenders who are able to expertly blend hands on relationship lending with robust numbers-driven due diligence and credit analysis to throw their substantial financial weight behind experienced SME developers and support them in any climate.
Even in the best of times, property development is a complex multi-phase process with many moving parts. A good developer knows that and understands that the success or otherwise of a scheme often relies on working with a lender who understands the challenges while recognising the opportunities.
The events of the past 18 months have showed that many banks’ focus has been on servicing existing portfolios and guarding existing relationships over farming new business and growing lending books. That, and property developers’ increasing desire to work with a lender who will continue to back them on good schemes through the tough times, has led to the rise of specialist non-bank lenders.
If there is one thing that the challenges of the past few months have taught developers the hard way, that is that they need to work with through the cycle lenders with a seasoned property solution driven team who are able to provide the right funding solution come rain or shine.
For further information on Blend visit Blend | Developers (blendnetwork.com).
