Many lenders have drastically changed their attitudes, and availability and terms of financing for residential development have become extremely difficult for small housebuilding companies.
Jessica Bird catches up with Paul Watson (pictured), head of lending at Blend Network, to discuss
Jess Bird (JB): Blend has been vocal about how the ‘lockdown on lending’ saw a consolidation in the market, providing an opportunity for nimble specialist lenders to gain market share.
However, we’ve also seen many specialist lenders drastically reduce their loan-to-gross-development-value (LTGDV) and gearing during the pandemic.
Why is that, and how do you see this trend evolving now that the pandemic has started to recede?
Paul Watson (PW): The initial lockdown and the price momentum we’ve witnessed since June last year has meant that even those lenders who kept doing business significantly shaved the LTGDV they were offering their borrowers.
The reality is that many lenders have drastically changed their attitudes to the sector since the pandemic, and availability and terms of financing for residential development have become extremely difficult for small housebuilding companies.
But I believe that now it's time to go back to pre-COVID levels of gearing for property developers and to get Britain moving again.
JB: Why are many lenders reluctant to go back to pre-COVID levels of LTGDV?
PW: Many lenders, especially banks, have very tight credit criteria and parameters that they need to stick to.
Even before the pandemic hit, traditional lenders had been tightening their credit policies for years.
Many even pulled out of lending on development finance altogether.
Now, as the pandemic ebbs many lenders continue to tread carefully in terms of pricing, gearing and underwriting.
Starting in March-April last year, we noted a marked reduction in appetite for lending among several of our competitors and assumed that this would be relaxed over time, but this does not appear to be happening.
By now, with life returning to some kind of normality, we expected lenders to begin to adopt a less cautious approach but that doesn’t seem to be the case and indeed, there are some signs of a further tightening up.
JB: How do you see this trend evolving into Q4 2021? Do you think lenders will go back to pre-COVID levels of gearing? Will we see a decoupling between traditional and specialist lenders?
PW: I think that specialist lenders will be much quicker to go back to pre-Covid levels of gearing while banks and traditional lenders continue to tread carefully and are slower to adapt. We have already started to see this trend.
For example, we at Blend Network recently announced the launch of a new high-gearing product that offers experienced property developers pre-COVID levels of gearing with up to 75% LTGDV and up to 90% LTC.
As part of the development finance market moving further towards specialization and professionalism, I do think we will see the dissociation between traditional and specialist non-bank lenders widen, with the latter being able to understand customer needs and offer higher gearing.
JB: The government is clear that we need to get the housing market – in particular new house building – moving again, even though the number of houses being built in the UK each year remain well below the target of 300,000 new houses a year.
How can lenders, particularly specialist lenders, can best support property developers?
PW: I think that finance, or the lack of it, remains the key challenge faced by property developers, especially small to medium (SME) property developers and small construction companies in the UK.
I regularly speak to property developers, and what I am hearing is that there are no shortage of development opportunities, yet many deals are lost due to the constrained nature of many lenders who have a limited understanding of the true requirements of the development process.
At Blend Network we see many fantastic deals where the developer is coming to us because traditional lenders and banks aren’t willing to max their gearing.
So, in those cases we are able to offer a blended facility that combines senior debt and mezzanine all in one product.
There’s only one way that lenders can support property developers to ‘get Britain moving’, and that’s by ‘getting lending going’.
That’s why we are saying to experienced developers loud and clear: if you have a good scheme and need to up your gearing to make it work, we’ll back you. We will offer you more cash than other lenders, we will max your gearing.
