Sales director of asset-based lender Davenham Property Finance, Darren Martin, explains how developers can increase their chances of funding, even though finance is harder to come by
If you are associated with the property sector it is not exactly a bed of roses at the moment. Activities within the housing market certainly make grim reading. The recent survey by the Royal Institute of Chartered Surveyors (RICS), for example, reveals that 64 per cent of the industry believes that average house prices are falling. The level of chartered surveyors reporting a decline in new buying enquiries stands at 37 per cent.
New instructions to sell property continue to fall and the survey also shows the stock of unsold properties on surveyor’s books increasing by more than 8.5 per cent in February. This represents the fifth successive monthly increase above 8 per cent.
Furthermore the average level of unsold properties per surveyor stands at 92. The highest level since 1998, when it was 93.
Confidence
The media is certainly not helping with confidence in the market, as they continue to frighten consumers about the credit crunch, falling house prices and lack of available finance. With house prices in many areas remaining stagnant or evening falling, alongside rising build costs, due to the price of steel, and inflation, deals that were being done 12 months ago with 100 per cent finance may no longer be viable.
Surprisingly, however it is not all doom and gloom in the sector. I believe this is the time when specialist asset-based lenders like us will really come into their own, as local knowledge and experience becomes a key factor in making decisions. We are certainly seeing more opportunities but we are all going to have to work harder for our money!
It may be a little hackneyed as an expression but ‘location location, location’ has never been more apt when looking at a deal. While the reports on the whole may not make particularly good reading it has been acknowledged that some local pockets are expected to grow.
Due diligence
Undertaking your own due diligence and meeting the clients on site is, I believe, fundamental to a successful deal. Ask yourself “Would you live here and if not why”. Have a walk or drive around the area, assessing what local amenities are available, where are the schools, and importantly, assess the local comparable property market. How much property stock is on the market, and what are they asking for these types of properties. In addition, nowadays we have readily available actual sale prices via various websites.
Working with a local valuer who will know the area and be able to provide valuable local commentary on the market and selling prices, is paramount. And when I say local, I really do mean local. It is no good asking a Manchester valuer to look at a development in the Yorkshire Dales. He would have as much knowledge of that market as he would about Chelmsford. You need someone on the ground that knows the area inside out.
The future
I think everyone agrees that right now and for the immediate future it is going to be a buyers market. As a lender we need those properties we agree to fund to sell in order to repay our finance, just as much as a developer needs them to sell to make a profit. With that in mind, we would certainly advise against quirky developments or those in ‘tricky’ locations, as these may not attract a wide market of potential buyers, and could take a lot longer to sell. A developer would be better building what I would refer to as a ‘vanilla type’ site. It doesn’t necessarily stand out from the crowd but it can appeal to everybody.
Although finance will be available for these types of developments, it will be less likely for the developer to be offered 100 per cent finance. For example, a new client and experienced builder approached us for maximum funding. All the figures stacked up including a very healthy profit margin, but it transpired that the site was located on a flight path to an expanding airport, thereby potentially limiting the number of people who would want to live there.
Local knowledge
Ultimately our due diligence and local knowledge can also be of help to the developer. Many vendors are still trying to sell land at inflated prices on the back of the rising market. Developers shouldn’t rush in and with our help and local valuers they should look to negotiate with the vendor, to pay a realistic price.
Once the finance has been agreed we have noticed that builders are also becoming more cautious with how much they borrow. A couple of years ago they would complete the development and move on to the next scheme, refinancing to our Developers Buy to Let product in order to cover the remaining unsold units. Many are now staying with our Development Finance product until they know the properties have sold, before moving onto a new site.
Let’s face it we all need to make a living. Developers need to keep on developing and we want to keep on lending. If the scheme is right there will be no shortage of money to fund it.
