It’s Not Tick-Box Lending Anymore

by | Mar 22, 2019

Real estate development is a complicated business even in good times. Anyone who’s been on the development journey knows this, and probably has the scars to prove it.

Over the past few years, traditional lenders who have built relationships with local developers, retreated from the market and that gave an opportunity for alternative lenders to fill the gap. The main problem was these lenders were more driven by getting capital out the door and generating fees, than they were about the underlying loans they were underwriting. Development lending went up and it was happy days for everyone.

Today as GDVs shift lower and as sales periods have extended by 16% in the last 24 months, a lot of these funders (and borrowers) are feeling the pain, and many loan books are severely in default. The automated tick-box lending approach is a dangerous way to lend to something as complicated as real estate development where a variety of things can hiccup even in the best of times.

A New Wave of Change in Alternative Lending

But the landscape is changing. A new breed of lenders in emerging in the space just in the nick of time. With the recent announcement of KKR recently teaming up with an alternative SME development lender, the alternative lending market is rapidly moving it up a notch. It appears that the early pioneers of P2P proved that the concept of alternative lending worked, followed by the household name alternative lenders, and now that the model is proven, a more real estate savy institutional type of alternative lender is slowly appearing to help solve the problem.

And why not. The SME lending market is vast. The UK, by all accounts, needs roughly 300,000 new homes per year, and the financial requirement to make that happen is a whopping number over the next ten years. Add on top of that the overall social focus of bringing back smaller SME borrowers back into the mainstream by government supported programs and you have a cocktail for opportunity and growth in this market. It is no wonder so many institutional investors are paying attention.

Nationwide Building Society indicate that the funding gap for the next 10 years, based on the annual target for new homes, is circa £208 billion

But…..many of these institutional and new challanger providers of residential development finance may not have the skill-set to underwrite smaller developments loans which take time and oftentimes are done on a bespoke basis. Deals between ~ £3mm up to £15mm are falling through the cracks. Where “one shoe doesn’t fit all”, big institutional type lenders are by their very nature “Big” and are required to rely on automation and volume. This opens the way for smaller boutique lenders to enter the market, backed by more risk-savy capital. These entrants, small and with skills and capital, will move faster and increase competition in sourcing and funding residential development projects.


It’s Not Tick-Box Lending

In fact, many of these new smaller competitors to the market will probably have greater real estate development, financial, technical and market research background which will up the ante considerably. Additionally, some of these new entrants may have higher risk tolerances, different risk assessments or even access to different sources of funding, which will allow them to take on a wider variety of loans and establish more relationships than the larger newcomers.

With a focus on SME lending, filtering better known developers is a “meet and greet” type of business, a lot of tire kicking, with a track record even more important than the project itself. Only getting out there and kicking the tires will do the trick; understanding the highest degree of comparability on sales, costs and investment characteristics can determine the quality of the project and this is where smaller real estate savvy firms will have an advantage.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Interesting article? Put our experience to work…

OakNorth Bank completes additional £20m loan-on-loan facility to Hilltop Credit Partners

OakNorth Bank – the UK bank powered by the OakNorth platform – has completed an additional £20m...

Hilltop completes pre-development bridging loan for greenfield residential scheme in Braunton, North Devon

Funds advised by Hilltop Credit Partners have completed a £360,000 pre-development bridging loan on a greenfield residential development...

Hilltop completes £3m loan for eco-friendly residential development in South Molton, North Devon

Funds advised by Hilltop Credit Partners, have completed a £3m loan to build a sustainable residential development in the historic market...

Hilltop completes £8.6m loan for residential development in Brondesbury, North West London

Funds advised by Hilltop Credit Partners has completed an £8.6m loan to 196 Willesden Lane Limited, an SPV controlled...

Stay In Your Patch

Property investment and development is usually best approached in one of two ways. You can either...

As seen in...

Logo - Real Estate Capital
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Real Estate Capital
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Real Estate Capital
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Bridging Loan Directory
Logo - Property Week
Logo - IPE Real Assets
Logo - Business Daily News

Register your interest here

 

Let’s talk! Get in touch on +44 (0) 203 903 6369 
or leave us a message below and we’ll get right back to you.

2 + 8 =

Share This

Updated April 2020 - UK Residential Real Estate Market Review 2020
Essential data for property developers and investors alike

Download here