Why the high street shuns developers

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The recession taught us that property prices, mortgages and development each have a big impact on the economy and act as a barometer for recovery. Ralph Black, CEO at Commercial Finance Brokers UK (CFBUK), takes a look at why the high street lenders are still not supporting property developers as the country eases itself into a period of economic recovery.


High street lenders love to publicise how they are supporting the recovery, quoting that they accept 80% of the proposals they receive, but this ‘smoke and mirrors’ only takes into account the loan applications that make it to “credit committee” for approval. The majority of businesses that want a loan don’t get as far as credit committee so never get a formal rejection and thus don’t make it into the statistics!

One sector where this is truer than any other is development finance – or loans for small and medium sized builders who want to build the houses that our country so desperately needs.

The main high street lenders will only support “gilt edged” proposals and only lend up to 60% of the purchase price of a site and 60% of the build costs. And whilst their rates are very good e.g. 4.5% over bank of England base rate, that’s not much help to a small builder trying to make a reasonable living. The explanation the high street lenders give for being so selective is that they are pricing these loans very competitively and therefore cannot afford to take very much risk. Not an unfair point, but quite why they won’t take more risk in return for a higher rate of interest is unclear. Plus, they will only support a project if it is backed up by a portfolio of previously delivered profitable projects – the self-employed entrepreneurial builder looking to move up a step will not be welcomed or supported.

There are, however, a huge number of other lenders – institutions, private investors and the like – who will take more risk in return for a higher rate of interest. There are also lenders who will focus more of their attention on the end value of the site when calculating what they are prepared to lend rather than the value today. Whilst that’s inherently more risky for the lender it can be argued to be more appropriate: after all, whilst our property market has had its hiccups it generally spends more time rising strongly than falling.

By searching the whole of the market it’s possible for builders to find finance for at least 70% of the purchase price of the site followed by 100% of the build costs, so long as the total loan doesn’t exceed 70% - 75% of the end value of the site. We’ve even seen cases where, if there is enough likely profit in the end value, the lender will roll-up the interest payments so the builder doesn’t have to make any loan payments during the build period.

For prime sites it’s possible to achieve even more competitive loans. For example, last summer we arranged finance for a site in Oxfordshire. The site acquisition costs (purchase price of £750k plus stamp duty, solicitors costs, local authority payments (S106) etc.) was around £850k and we found a lender to provide £567k which represents 66% of the acquisition costs but a massive 75% of the bare purchase price.

Whilst rates for these loans might be approximately 12% pa, the profit margins on building normally means that the finance costs are not going to render a project unviable. The important thing is to ensure builders are aware of all the finance options out there and that they can be connected with lenders that are keen to support their projects. And that’s where an independent, whole of market broker, like CFBUK, comes in.

Media contacts

Hana Ballard: Hana(at)thebridgemarketing(dot)co(dot)uk | 07810 448319 | 01394 383646

Notes to Editors:
CFBUK provides innovative commercial mortgages for businesses and property investors. It is a market leading brokerage that takes the hassle out of obtaining commercial and business finance.

CFBUK is an independent, Whole of Market Broker that can deal with all lenders operating in the UK. With over 20 years’ experience and a famous, no-nonsense approach, the service they provide is fast, efficient and focused on results.

More info can be found at http://www.cfb.com

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Hana Ballard
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CFB UK Commercial Finance