As Vantage Finance celebrates its 10th anniversary, we’ve been reflecting on how far the commercial finance industry has come and the ups and downs it has faced along the way. A particular challenge has been the upheaval those working in development finance have experienced.
Pre-credit crunch, this sector of the market was booming. The main clearing Banks were offering development funding and the criteria was not as strict as is commonplace today, with lesser due diligence requirements. We saw a continual increase in property prices largely down to the wide availability of mortgage finance at that time. Lenders were gearing quite heavily in this space and property developers could access finance regardless of their experience. Additionally, their financial contribution to each project was relatively small, sometimes even non-existent, meaning it was the banks which took most of the risk.
When the crunch hit, many developers found themselves in difficulty as they were highly geared and overexposed. Lenders were pulling funding in mid flow, and development projects stalled as investors were unable to find alternative lenders to support them – grinding everything to a halt for many.
Commercial development was the worst hit as rents and property values fell – values suffered by as much as 40%. An independent report for the Department of Communities and Local Government (DCLG) noted that the capital value of commercial property rose by 53% between December 2001 and June 2007. However, when the credit crunch hit, property values fell sharply and so did the change in sentiment among investors.
Alongside the change in investor attitudes, the drying up of tenant demand for office space also played a part in the demise of the commercial development sector – the result of so many businesses suffering and scaling back. The speculative nature given the lack of tenant demand meant that the availability of development finance dried up.
A change in the availability of mortgage finance across the board was also a key driver as refinancing upon completion of development or sale provides the exit for a development finance loan. Some demand remained for residential development as there were still people looking to build, however supply had completely dried up with all but a few lenders active in the market. Those lenders still actively lending had far more opportunities than they could process, resulting in a cherry picking exercise often keeping funding to projects of a certain size and in a certain area.
Over the last three years, new and old lenders have returned to the market. Development finance is growing after being more or less decimated by the credit crunch. The new availability of finance gives developers more choice through increased competition in this space. Specialist lenders are all offering similar pricing – either higher rates and lower fees or lower rates and higher fees.
Encouragingly, the Council of Mortgage Lenders (CML) estimated that gross mortgage lending reached £19.1 billion in July this year, the highest monthly figure since August 2008 before it dropped considerably. As a result of this there is more confidence amongst lenders for the resales which will exit their loans.
An interesting stat showing just how much this type of finance has recovered comes from the NACFB’s annual broker survey: it reported that NACFB brokers have seen an 18.4% increase in development lending between July 2013 and August 2014.
Post-recession, it’s clear that lenders are far more cautious about high levels of gearing. Whereas in the past the bank took most of the risk, the developer is now expected to make a decent cash contribution, ensuring a more equal playing field between lender and developer. The less a developer puts in, the more they’ll have to pay in the pricing. There’s been a wholesale shift in lenders’ attitude to risk; whereas pre-credit crunch developers’ experience wasn’t accorded such high priority, now a borrower’s experience is scrutinised. Developers are expected to have a track record in development – without that, it’s hard to place an application – but the healthier attitude to risk prevalent in this market space is to be welcomed.
The development finance market has turned a corner and, despite the landscape changing dramatically over the last decade, it looks set to be an exciting area to work in over the next 10 years.
Lucy Hodge is director of Vantage Finance