Granit Labs is our new resource for commercial developers who want to stay in touch with the latest property development opportunities and options.
There is a lot of information available online, but some times it’s easier to listen than to watch or read. Our Granit Labs feature interviews with trusted experts we work with to help our clients realise profitable property developments. Each interview is up to 20 minutes long, so you can enjoy them over a coffee or a short journey in your ear pods.
We are kicking off with Granit’s James Munro interviewing Martyn Pollock of Hallcroft Finance.
Martyn is an expert at helping developers to arrange finance for their schemes. James and Martyn discuss the impact of Covid and the lockdowns on raising development finance and look ahead to the effects of the Government’s new support schemes on those seeking finance. If you have an interest in raising development finance, you will find this interview interesting.
Listen in here:
If you are someone that prefers to read, we’ve got you covered. You can find a full transcript of the interview below.
James: Hi, this is James Munro, Director of Granit; residential architects and interior designers based in Clapham, South London. I‘m here today talking with Martin Pollock of Hallcroft Finance.
Hi Martyn.
Martyn: Hi James.
James: We’re just having a quick catch up today about, I guess, we’re a year into when we first went into lockdown. We’re finding the construction industry incredibly busy at the moment.
Lots of new projects starting, lots of commercial clients waking up and looking at sites and wanting to get things moving and getting planning in place.
And some of our developers who had planning on sites are now wanting to build them out and looking for finance.
How are you finding it from your perspective?
Martyn: Gosh it’s a really good question; I guess it’s a year on from the first lockdown and, after the first lockdown, I’ll be very honest our pipeline of deals was absolutely decimated. So Q2 and 3 were really strange for us.
So Q2 started with the lockdown. Everyone started working from home and our developer clients didn’t really know when they could get their team on-site; and certainly, couldn’t access materials straight away.
In Scotland, some of our developers continued throughout the first lockdown and couldn’t get any of their contractors on site. It started to ease up a little bit for England and Wales. Contractors got back on to site and materials started to getting delivered to site and so we made progress.
But, our pipeline was, I mean effectively decimated for May and June. Then all the sudden in July, the market reopened again, and so, from we’ve been building from August and all the way after the summer through into the winter and right now the first quarter of 2021 has been our strongest quarter we’ve ever had as a business, on new business enquiries and deals closed.
So, it’s really flip-flopped for us into a really strong position.
But, in terms of the impact that lockdown had in finance more generally and not just our solely business, from that selfish perspective, more generally, it’s been really interesting.
Immediately, as soon as the pandemic hit, the challenger banks all reduced their loan to values by 5% and there’s a challenger bank, a development specialist called Close Brothers, and Close Brothers have been through a number of cycles.
Probably at the Millennium 2001 and 2002, they were maybe a lender of last resort when it came to development finance. However, they went through so many cycles and performed so well that they are now the gold standard for development finance.
And so they operated a 60% loan to GDV and charge out their interest around about 6%, which is not groundbreaking, but it’s the support of the offer to the developer clients which sets them apart from the entire market.
So as soon as lockdown hit they reduced their loan to GDV by 5%, and so that was then lending money around about 55% or 50% loan to GDV. Which effectively means that you’re putting in 40 or 45% of the cost by way of equity, so for a developer, that’s really extremely expensive.
So the rest of the market seemed to follow Close Brothers, so your United Trust Bank, your Oak North, they all took a step back and thought wow, too overexposed, we don’t know where this is going. And so what we’ve seen is the first lockdown really affected loan to values.
But then again, along with our business recovering, the markets recovered and so loan to values have then come back. And have bounced back to where they were pre-pandemic and actually what’s happened, and this is a really interesting sort of affairs.
The Help to Buy scheme has helped developers sell product. And as a result of that strong growth in that market, and as a result of strong residential sales after the first lockdown, banks and private equity funds have got really quite confident in the market. And now they’re lending up to 70% loan to GDV.
Further to that, the government bank quango Homes England has backed, United Trust Bank and Invest in Fund – a private equity fund – to lend at 70% loan to GDV into areas where previously they wouldn’t have been lending. So now we’ve found that the first lockdown really affected loan to values negatively, and we’re in the middle of this, maybe the third block down, and we’re really in a strong position with loan to values.
It’s really interesting and even further to that, with Rishi Sunak launching the government 95% mortgage, that is going to inspire more first– time buyers to try and get on the property market, on the property ladder I should say, and they’re not going to be limited to Help to Buy schemes that are new builds.
That limitation won’t be within that that 95% mortgage, so they’ll have a huge market of up to £600,000 purchase price that they can spend or the mortgage money on which is really going to help developers refurbish existing properties build new townhouses, build new residential units all over the country and get access to those new buyers. So, I see demand really supporting the market and continuing that 70% – I don’t see going above 70% – but definitely supporting that 70% loan to GDV funding.
James: That’s really interesting.
So, what do you think? Is it very simplistic to say that the lending requirements change because of uncertainty in the market? Is it that simple?
What drives those changes in the lending requirements?
Martyn: I guess it all comes down to market liquidity, right?
As soon as the lenders feel that there’s going to be a tightening of their ability for the developers to exit their development schemes, they won’t want to be overexposed.
Conversely, if they see that the market is quite liquid and the developers will be able to sell their product through fast and will be able to exit, or exit the development finance or redeeming the development loan quickly, then you get more confident.
I’ll give you an example. We’ve got a client that’s just delivered 8 units in Hampton Wick, right next to the River, beautiful little and side down in Kingston on Thames.
And so, they’ve delivered six of the units. The last two units are going through a minor amendment planning play to try and change the pitch of the roof.
And they had about three weeks an open day to sell the eight houses. They did it on a Saturday.
They opened on Saturday 9:00 AM and by Saturday 5:00 PM they had sold all 8 units to Help to Buy buyers so that just shows you the lenders are going to be getting confidence off that because they can see that developers can deliver well and can sell very quickly and therefore their risk of redemptions is low.
If you compare that to commercial assets and office assets is a really different picture. So if you are trying to fund or refinance office assets, well lenders right now are setting some of them are sitting at home analyzing these application form, or these applications for funding, and they’re not even in the office, and therefore they’re finding it hard to get comfortable with current valuations of office and commercial assets to an extent that that part of the market is completely seized up.
James: It’s interesting you talk about those flats selling in one afternoon, and there’s clearly a demand for a certain type of property. New build in a certain part of Southwest London. I mean, we often get asked by our developer clients when we’re looking at a mix on a site, which ones are going to sell better? Which ones get the best return?
What do you think most developers are looking at the moment, I mean there was a big trend in build to rent wasn’t there and people looking at student accommodation and I can’t imagine that’s a big driver at the moment but, what works?
Martyn: It’s interesting, there’s been two senior debt funds that have been launched in the past six months and their sole focus is to fund student accommodation and retirement living.
And so actually, it’s still a really growing sector. It’s quite an expert though, so lot of funders don’t quite understand it because of the funding cycle and the repayment cycle and having to start, you can’t deliver student accommodation build in December. You’ve got to deliver it in time to get it filled by that August or September. So that’s a the small part. There’s a lot of thought that goes into that particular market.
In terms of what sales well,
I mean, we‘re not an estate agent, we’re an expert in structured finance for development and an expert in development finance and some investment finance on resi and commercial assets?
But we see, so, a lot of our clients come to us with 9 units in Thornton Heath, 9 units and Milton Keynes, staying under that that that 10 minutes, so there’s no affordable housing and not commuted sums payable. So in terms of units, we see a lot of sort of less than 10.
What really sold well with those units in Kingston upon Thames and Hampton Wick. Why these sold really well, I believe is, they were all ‘Help to Buy’, they’re in a great area of Southwest London and the Pound per square foot is really high. I mean it was almost £1,000 per square foot.
But they were dainty little properties presented really well, and the developers effectively selling a dream. And it’s an achievable dream for people to put a 5% deposit in, the government then putting 40% down by way of the help to buy. And therefore, they sold really well.
So, if you’re delivering, I mean, a lot of my clients come to me and say, ‘do you think this scheme will sell really well?’, and there’s maybe 3 or 4 units in there that are over £1.5 million. Well, clearly there’s less people that can afford those units.
And as a result of them not selling so well, you’ll be stuck on your development finance for longer and you’ll be unable to redeem your lender as quickly as they potentially want, and therefore they may want to reduce their loan to value, meaning you have to put more equity in.
All of my developer clients are wanting to reduce their day one capital investment, and so if they’re wanting to do the most liquid of all developments, you’re probably looking at two-bed flats.
And in a good area, delivered well, that qualify for the 95% mortgage coming out next month or a ‘Help to Buy’ scheme.
James: Understand, yes. Are some of your clients using short term finance to raise that extra bit of finance they need to, you know, the difference between the loan value to GDV. How do they borrow that money essentially?
Martyn: Yeah, so a typical capital stack for us, if you’ve got 100%, of costs, that’s which will be spent on your land, your construction cost and in your finance cost making up that 100%. Typically, we’re looking about 85% of that cost coming from a senior lender and the remaining 15% coming from the from the developer.
Now in terms of minimum standards, senior debt providers are going to want to see at least 10% of costs coming in from the developer.
But that can come in between different ways, but what we’re seeing on that 15%. We’re seeing, mezzanine lenders coming in a second charge basis. We’re seeing equity investors coming along and also backing it. I mean, the market is buoyant with equity and debt providers, and so if there’s any developers listening to this, or speaking to Granit, they shouldn’t have any concerns about raising either debt or equity.
You can also speak to us to do that, but there’s a lot of built-up demand for investors and debt providers in the market, because after lockdown in 2020 there was a shortage of deals getting done. All the while investor cash was sitting in the bank, and when that investor funds are sitting in an investment fund’s bank account they might be paying a return on that money.
Now the fact that they’re not using that money means their return on capital hits their bottom line, so they have to get motoring.
So there’s a lot happening right now in structured finance to get that money moving, and so if you’ve got relevant experience or you’ve not got experience, but you’ve got the relevant team to deliver the project, I see no problem in getting a project funded.
James: Yeah, and we’re finding with a lot of our clients, I know we’ve talked about this before, that the JV is very common. The joint venture, it’s where they structure a deal so that a developer is going in with the owner of the land, or other interested parties putting in different equity into the project and setting up a company to deliver that project.
Is that about risk? Is that about finance? What do you think are the drivers for that?
Martyn: Well, I think it comes down to day one equity investment at the end of the day because if you are a developer and you want to develop the site, there’s no easier way than you to buy the site well, deliver the site well and then you can sell it, well.
If you do the first two right, in a desirable location, you will have no problem realizing your 20–25% profit margin out of that deal.
However, if you don’t, if you are stretched and maybe you’ve got two or three other developments going, and maybe you see an opportunity and a landowner wants to joint venture with you, then you don’t have to speculate your day one capital into that deal.
Those joint venture arrangements always, really interesting. We negotiate a lot of them on a daily weekly basis, and it’s just quite interesting to try and understand everyone’s different goal within it.
Within a lot of our joint ventures, we recommend that the developer, when we’re representing the developer, the developer has control of the site. He has to have control the site so we can deliver what he needs to deliver without any confusion. To then take that to market and sell it well.
Because if there’s any confusion about deliverability and any confusion about the end products it’s just going to delay matters, cost the scheme over and then you make less profit out of it. In terms of lenders, they are happy to transact on these joint venture arrangements.
One of the things though that’s coming through their head is, if you’ve got a landowner in a developer coming to the table.
And the landowners may be one piece of land for any number of years, built up planning, could have not paid, maybe didn’t pay a lot for it back in the day, and now it’s worth quite a substantial amount because it’s got planning consent.
Well, he’s got an asset he’s putting in.
The developer comes along, the developer has some skin in the game, so actually, there’s quite an interesting arrangement there, because you have to get commitment from the developer to make sure he’s going to be tied scheme to deliver it well, and the landowner has to be represented in it as well.
There’s also, there’s always some negotiation over the structure and stamp duty and moving assets from one entity to the other.
There’s a lot of these things that come into play, but the long and short of it is the developer should be able to do what he does. The landowners should be represented and protected, and the senior debt provider equity providers have to understand the security package.
James: So if I understand that correctly, the lender is really scrutinizing the structure of the deal that these people are putting together.
And asking them, have you considered your responsibilities and obligations under your arrangement?
And I mean, they’re de-risking their lending, aren’t they? That’s what they’re doing.
Martyn: Yeah absolutely, absolutely.
I mean, we’ve got some small things where you might have a landowner or property owner who wants to joint venture with the developer to deliver an amazing townhouse development, or refurbishment of the townhouse into a number of luxury flats.
If you’ve got that, that property owner who wants to be involved in the delivery of that process to learn on the job, or learn from the developer, well from the senior debt providers perspective, red alarm bells are going off there because, they’re worried that the developer can’t do what they do, what they’re expert at, and they want them to be able to have a clear run to deliver that scheme.
If the landowners get in the way of wanting to be part of the design process, it’s just going to delay matters.
James: I just want to finish on one sort of final question you know, I think we’re both very optimistic about this year.
Do you see any kind of changes to the lending requirements?
You know with your crystal ball, there’s been a bit of talk in the press about, you know changed interest rates, potentially.
Martyn: I mean, I can’t really comment on interest rates too much because I think that they’ll stay low and consistently low. I do see, so there’s the coronavirus business intervention loan scheme CBILS, which is being withdrawn on the 31st March, that’s been replaced by the Business Recovery Scheme.
And the business recovery scheme has got an 80% government guarantee, now that’s going to let senior debt fighters lend money where they previously didn’t. And so if you had maybe a tertiary location which you couldn’t find funding for, the business recovery funds should be able to support a senior lender giving you debt for that site. And I think that’s going to change the market significantly.
James: Martin, it’s been an absolute pleasure talking to you again, and I hope to catch up soon.
Martyn: Cheers thanks, James.
To find out more about how Granit helps commercial property developers and investors to make the most of the opportunities available in property development, why not talk to our team.
