Build March Issue

Build Magazine 58 mall property developers are facing larger challenges in securing development finance than ever before. There are numerous factors that are impacting banks’ and investors’ confidence when it comes to lending, such as: the ongoing economic turmoil in China, the question mark hanging over Britain’s future with the EU, a continued fall in oil and commodity prices, increasing construction costs, and the rise in stamp duty. Less confidence means they are less willing to put their money with small and mid- sized businesses and developers who carry greater risk than their larger counterparts. While there are a number of bridge finance players who are now actively offering between 1-1.25% monthly interest rates, there is a very pronounced lack of supply when it comes to development finance. In fact, according to a recent survey from insolvency specialists, Begbies Traynor, more than 50,000 construction and real estate firms have begun this year in ‘significant’ financial distress. This is despite the fact that since 2010, smaller developers have built as much as 80% of the UK’s new homes. In order to try and improve the lending situation for smaller developers, the Home Builders Federation has proposed changes to planning regulations and incentives for building on brownfield land, but I’m not convinced this will be enough. The government also needs to look at what can be done from the lending perspective rather than just the property development perspective. A big issue is that lending to small developers requires the same amount of work as lending to larger developers who require much bigger sums, encouraging larger lenders to focus on larger developers. In order to create a more level-playing field and ensure smaller developers are being adequately served, the government needs to address the competitive disadvantage smaller, newer lenders such as OakNorth have. If we had similar capital and regulatory reporting requirements as the large, incumbent banks, we would be able to lend even more to smaller developers. Perhaps one of most important changes to affect the construction sector in the last year is the rise in stamp duty. In most cases, to get planning permission to build a large, residential property, developers need to have a certain amount of affordable housing in it. This wasn’t a problem before because they could still make a profit on the development through the sale of premium flats within the building. However, with the rise in stamp duty, which has made purchasing these premium properties more expensive, demand for them has decreased which means it’s harder for developers to make a profit. If they can’t make a profit, lenders are less likely to grant them a loan. This climate, however, does not need to be the impediment that most property developers think it is; with lateral thinking and planning, small developers can ensure they get the funds they need at a favourable rate even in this time of economic turmoil. One of the most important first steps any developer should take is to shop around; as explained earlier in this article, large banks often lack the incentive to lend to small developers as the margin they’ll be making is minimal. While large banks of course still have a role to play in the lending environment, it is important to consider other options such as smaller, more specialist banks, development lenders who make this industry their top priority, and alternatives such as crowdfunding and peer-to-peer lending. Not only will this initial research save you time (and sanity!) further down the line, but it will also give you a better idea of who you’re most likely to secure a loan with. One of the biggest mistakes small developers make, largely because they’re often stretched for time, is to simply go to their existing bank for a loan. However, their bank may not be willing to lend to them or will only do so at a less SecuringDevelopment Finance as a Small PropertyDeveloper By Rishi Khosla, CEO of OakNorth, a new bank offering business loans, property development finance, property investment loans and a range of savings accounts. S