• Property Development Finance – Who’s Lending in 2012

    Well, 2012 has almost run its course, but the question is valid.  January 2012 was greeted with the usual enthusiasm associated with a New Year, many commentators believing that things can only get better.  But has the availability of property development finance improved.

    In December 2011, the BBC were reporting that the UK property market was likely be even more depressed in 2012 than 2011.  Sales were predicted to be low and as a consequence prices would remain depressed.  This is of course relevant as Property Developers need to know that people are buying houses before they can raise money to fund the build.

    One of the biggest fears 12 months ago was the seemingly imminent collapse of the EU.  Frank Knight were predicting that prices would fall by 5%. Somewhat amusingly Martin Wade of Your Mortgage Decisions was hedging his bets by predicting anything between −5% to 10% growth which is a pretty wide margin.

    What Did The Property Market Do in 2012

    Putting aside the headline figures of how many billions were lent, property developers will be watching closely to see how many units are being sold.  This chart is produced from the Council of Mortgage Lenders website and it shows the number of mortgages advanced each month compared to the same period last year.  August shows the highest number of loans advanced in a single month since 2010, however early estimates for September are not so good.

    Given that interest rates remain low, and the EU crisis appears to have gone from critical to routinely “just not very good” the best that people can hope for is probably more of the same.

    Keeping to the August theme, in 2011 9,978 new homes were registered with NHBC, which is almost the same as the number in 2010.  Jumping forwards to January 2012 the figure falls to 7,831 of those 5,977 were private sector builds.  Of course not all new homes are registered with the NHBC.

    Understanding Property Development Finance 

    Firstly, forget about the big developers.  Bovis and their friends don’t go and see their bank manager or a broker to ask for a loan.  They have a different funding model.

    Overall the CLG figures show that around 85,000 private new dwellings were started in 2012 and 2011.  But it’s difficult to know how many of these are being built by small builders.

    Raising property development finance is no easy task.  In the main the people lending money are either going to be the mainstream banks or specialist/private lenders.

    Banks have rigid criteria and given that conventional mortgages are still in very short supply there is no sign that credit for property development is getting any more available.  It’s not easy to comment further as banks typically keep their lending criteria private.

    The specialist lenders have a slightly more flexible approach to evaluating projects but will naturally be cautious.  I can remember arranging finance for a novice builder to build two new-builds on an old garden patch.  He’d never done any new-build work before but were able to secure 100% of the build and site costs, paid in advance stages.  Somehow I very much doubt that would happen again.

    Where in 2006 it may have been possible to raise 65% of the Gross Developed Value (GDV) it is more likely to be in the region of 50% now.  You can also expect to be asked to offer up additional security if the figures are tight.

    Thankfully some of the better independent lenders (such as Regentsmead) have stayed the course and remained in business.  Although it was a shame to see Davenham Property Finance go.

  • Property Developers Report Increased Profits

    Property developer, Bovis Homes Group have shared some good news in their preliminary results for the year ending 31st December 2011. They report an operating profit of £36m for 2011, an increase of 69% on the previous year.

    The background makes quite positive reading too. There were 2045 completed home sales, an increase of 8%. The average sale price was £180,100 which is up by 5% on 2010. Bovis has also increased its land bank as it now holds 18.749 plots with outline or potential planing consent against 17,325 in 2010.

    David Ritchie, chief executive of Bovis Homes Group, says:

    As well as driving profitability, the Group is focused on enhancing shareholder returns through improving the efficiency of its capital employed, through land bank management, including the sale of consented plots on selected sites, and by managing working capital tightly.

    2012 is looking better too, private reservations have apparently increased and are reported to be ahead of expectations.

    Taylor Wimpey

    One of Britain’s largest volume new home builders have announced increased profits, and resumed dividend payments for the first time since the property crash.

    Gross profits were up by 25% to £287m, boosted by the sale of written down land which achieved a better value than expected.

    The average selling price for a Taylor Wimpey home was £185,000 which is just £1,000 up on the previous year. They were the first to point out that the increased profits were more to do with efficiency savings rather than a marked improvement in the general housing market.

    Persimmon Returns 1.9bn To Investors

    Persimmon has announced that it is returning the cash at the same time as reporting full-year results showing pre-tax profits fell to £147m from £154m in 2010. Revenue for the year was £1.54bn down slightly on the previous year’s £1.57bn

    Persimmon reported that they completed 5,643 home sales in 2011, which was nearly 3% lower than the prior year. Although they said that the second half improved with sales 7.7% higher than the previous six months.

    The average selling price was £167,580, down 2.8pc on the previous year, which Persimmon blamed on smaller houses making up a bigger share of its sales.

  • Property prices ups and downs, again.

    According to the latest Rightmove House Price Index for May 2011, the UK property Market is remaining in a state of limbo. A lack of proceedable buyers is not helping, and a it would appear that most new sellers are marketing under forced sale conditions, sometimes holding out for unrealistic asking prices. Although there is also conflicting data from other sources.

    London property prices buck the trend.

    Some London based agents are reporting that the average price of a house in North London is now £367,594 – around 1.2% higher compared to last year. The average price of a house in South London is £305,249, which is an annual increase of only 0.2%.

    According to the latest Chesterton Humberts/cebr APRIL 2011 House Price Poll of Polls, this makes North London house prices £62,345 more expensive on average compared to South London. The gulf between the two areas has continued to widen, from last years’ gap of £58,595.

    Whereas the latest data from the Communities and Local Government department show UK house prices fell slightly in the first three months of the year.

    Apparently From January through to the end of March this year house prices were 0.5% lower than for the previous three months.

    Gross mortgage lending tumbled by 14% in April to an estimated £9.8 billion, according to the Council of Mortgage Lenders.

    Interest Rates are not the only factor

    According to research by the Halifax many homeowners may have benefitted from low interest rates, but they are currently facing their highest household costs for three years.

    They say that Over the past year, the average annual cost associated with owning and running a home rose by 1.4% (£127) from £8956 in March 2010 to £9083 in March 2011.

    So once again there are conflicting news items about property prices, and it’s not all bad news all of the time. This has to be good news for property developers.

  • Property prices ups and downs, again.

    According to the latest Rightmove House Price Index for May 2011, the UK property Market is remaining in a state of limbo. A lack of proceedable buyers is not helping, and a it would appear that most new sellers are marketing under forced sale conditions, sometimes holding out for unrealistic asking prices. Although there is also conflicting data from other sources.

    London property prices buck the trend.

    Some London based agents are reporting that the average price of a house in North London is now £367,594 – around 1.2% higher compared to last year. The average price of a house in South London is £305,249, which is an annual increase of only 0.2%.

    According to the latest Chesterton Humberts/cebr APRIL 2011 House Price Poll of Polls, this makes North London house prices £62,345 more expensive on average compared to South London. The gulf between the two areas has continued to widen, from last years’ gap of £58,595.

    Whereas the latest data from the Communities and Local Government department show UK house prices fell slightly in the first three months of the year.

    Apparently From January through to the end of March this year house prices were 0.5% lower than for the previous three months.

    Gross mortgage lending tumbled by 14% in April to an estimated £9.8 billion, according to the Council of Mortgage Lenders.

    Interest Rates are not the only factor

    According to research by the Halifax many homeowners may have benefitted from low interest rates, but they are currently facing their highest household costs for three years.

    They say that Over the past year, the average annual cost associated with owning and running a home rose by 1.4% (£127) from £8956 in March 2010 to £9083 in March 2011.

    So once again there are conflicting news items about property prices, and it’s not all bad news all of the time. This has to be good news for property developers.

  • A Quick Refresher on Property Development Finance

    Property Development Finance is a form of financing particularly for developers of commercial and residential building  projects.

    Property development deals can consist of an assortment of short and long-term elements, including equity and mezzanine finance, plus standard bank debt.  These kinds of loans have lower perceived risks for lenders because they know their customers and will recover their money when the development sells or is re-mortgaged.  Property development finance is usually a short term type of financing that may be for between 18 to 24 months.

    When looking to take out property development finance the most important point to remember is that the rates of interest can vary considerably.  Factors which are taken into account when setting the interest rate will include your experience in property development and general credit worthiness. Rates will be based mostly on the industry sector at the time and the strength of the proposal you are putting forward.  A broker can help you to get the cheapest rate of interest and the best deal when it comes to property development finance funding.

    If you’re just starting out, banks will most likely require a higher level of security.  This means you have to put more of your own funds into the development.  However a broker is more likely to be able to negotiate this for you particularly if you have a proven track record and background in another sector.

    There are varying levels of property development finance available but simply put, you can borrow up to 100% of the purchase price & 100% of the development costs.  High street banks normally only grant 50/50 funding (50% for the acquisition and 50% for the building).
    Bridging finance is another tool for the developer to use, particularly useful if property development finance can not be raised because of planning problems.

    A commercial mortgage broker is more likely to have a greater knowledge of the complex options involved with property development finance and have better access to the marketplace.

  • Property Development Finance in amongst Predictions of doom for property prices

    Looks like the doom and gloom merchants are out in force again.  But who should property developers believe? We take a look at some of the property press over the last week for hints as to where the property development finance opportunities may be hiding.

    Predictions of falling house prices:

    On 13th July 2010 popular money website Thisismoney.co.uk reported that prices are set to fall.  They quote four leading economic “gurus” each predicting varying degrees of badness. They included:

    • accountants PricewaterhouseCoopers
    • the Royal Institution of Chartered Surveyors
    • the Council of Mortgage Lenders.

    The prediction in the thisismoney article is that property prices could remain depressed for at least the next 10 years, possibly even seeing £40,000 taken off the price of an average house by the end of 2012.  The cause of this continued depression is apparently the lack of employment and the prospect of higher interest rates.  No affordability to sustain current prices let alone any increase.

    Actual falls in property values:

    on 19th July 2010 the largest property website on the web, rightmove.co.uk reported a drop in asking prices of 0.6% from June’s figures.  Rightmove state that mortgage approvals are running at about half the number of new properties being placed on the market.  Supply is outstripping demand.  Rightmove predicted that house prices would end the year at the same value as January 2010, therefore they expect to see the gains early in the year completely wiped out.

    Property Development Funding still an option?

    The general public and policy makers are naturally fascinated by the reports with some people accusing the media of talking the market down, to others saying that the basics of economics still hold true and the market has to be correct before things improve.

    Property development funders are obviously concerned that they are not funding development ideas that will sit unsold for months, but believe it or not there are still quite a few funding opportunities out there for good quality developments.

    There are still regional hotspots where local conditions are ripe for development opportunities.  So don’t be too despondent about reports of a falling market, keep looking and keep asking lenders to consider proposals.