Mid-market housing developers seeking funding are seeing their hopes crushed by town planning commissioners, says James Slinger, property partner at Cambridge UK law firm Taylor Vinters. The planning blight is crippling developers’ hopes of securing bank finance, he argues.The vicious cycle is even driving some developers out of business, says Slinger.
He said: “Essential to the ebb and flow of local communities and a key area of industry for regional commerce, small to mid-size residential property developers do not only have to work harder for every transaction, but they are also being squeezed from all sides.
“Let’s not forget what a pivotal role this sector plays in neighbourhood developments within the local sector – as part of the integrated community it’s vital that we work together to make business happen.
“To help small to mid-sized property developers break out of this cycle or find alternative funding and other ways to make profit, there are three key factors to consider surrounding the viability of getting a site up and running. These include: expectations of the landowner as to the amount to be paid for the land; front loading of the ever-increasing cost of obtaining planning; and cash-flow needed to actually fund this and commence development. And all this before the site is income generating!
“In addition, frequently there is the cost of dealing with more than one landowner, complex acquisition agreements, numerous profit shares and overages, as well as issues surrounding the Community Infrastructure Levy and section 106 obligations.
“These and a host of other developer obligations can cause the initial spend to sky rocket. These crucial aspects, linked with the risk of lower return and concerns about overall viability, minimise the room for slippage in the bottom line.
“We all hear that traditional funders are ‘open for business’, and of course some are. If you are developing a site and have a successful history in development, a lower loan to value, lots of cash, and are willing to enter into a debenture – with perhaps the odd cross-company guarantee and even the occasional personal guarantee – then some funding may well be forthcoming. This level of security for the funders is generally unacceptable and, in most cases, not achievable for the average borrower.”
Balance the initial cost whilst looking at a number of different funding streams and ways to generate income, says Slinger.
“In the heady days of capital growth even the banks were persuaded to enter into a joint-venture agreement and share in the development profit. In current times it is the affordable housing providers that are becoming increasingly interested in ‘market value’ development opportunities. Their input can often help fund the cashflow to cover the cost of the initial infrastructure. With this in place, the bank may well show a heightened interest for funding downstream.”
“Alongside the traditional outset joint venture with a fellow developer or landowner, it is worth keeping abreast of developments which may be struggling, not because they are a poor proposition but where finance or relations have become strained.” Slinger says.
“Being able to step in to another development partway through can be an attractive proposition, one that has the potential to provide a better bargaining position for the incoming party, as well as seeing a shorter and more accurate return on investment.”
Slinger says: “Promotion agreements are becoming ever more popular and can be enticing for the landowner as there is a genuine desire on all parties to maximise the value of land.
“The promoter may not actually be the person that develops the site, however, by utilising its expertise and knowledge of the marketplace to obtain planning permission, a developer acting as a promoter can get a healthy slice of the sale value. Sometimes, by way of a hybrid agreement, the developer can also have an option to acquire at least part of the site at a later stage.”
Then there is the cash-rich investor or a non-bank funder. Slinger says: “These parties normally have a more entrepreneurial spirit and are looking not only for a return on their loan but also a share of the profit and possibly input into the development process.
“This could mean taking on not only finance but also an additional shareholder either of an overall parent company or a property-specific group company. The possible downside to easier funds is a loss of control; however, if the cash-rich investor has skills to add then this can reduce the overall risk.”
Slinger says: “As we have recently heard, in a fresh move to kickstart the economy, the Bank of England is to start offering cheap cash loans to high street banks.
“Banks will be able to swap poor quality assets, such as credit card debt and commercial real estate loans, in return for a six-month cash loan. This should be a benefit – as lenders themselves depend on the banking system to raise funds that they lend on via their mezzanine finance facilities. More active lenders should, in theory, mean more funds available to lend to developers.
“This said, with the scrutiny of development projects remaining tough it would appear that lenders will still concentrate on reasons not to lend for some time to come.”
“One good thing to have come out of the last few years is that people are much more open about making business happen,” says Slinger.
“A good professional adviser should understand what clients are looking for. If everyone has their eyes and ears open for opportunities and works together then it increases the likelihood of projects moving forward which, ultimately, is a benefit for everyone.”
• PHOTOGRAPH SHOWS: James Slinger