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.

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