When looking for development finance, how lenders interpret the implementation of Permitted Development Rights has thrown a spanner in the works for property developers. Gavin explains and looks at the current borrowing options for developers.
Most of you will know that in May 2013 a range of time-limited permitted development rights came into force. Some rights allow development to be retained permanently but require that it is completed by 30 May 2016. These include:
• Single-storey extensions increased from 4m to 8m for detached houses and from 3m to 6m on all other types of houses.
• Size limits extensions to shops and professional/financial services establishments increased to 100 msq, or half the original floor space whichever is smaller.
• Size limits for extensions to offices increased to 100 msq, or half the original floor space, whichever is smaller
• Size limits for new industrial buildings within the curtilage of existing industrial premises increased to 200 msq
• Change of use from offices (B1) to residential
The deadline date of 30 May 2016 is now just over a year away and as the date looms ever nearer we have seen a steady rise in applications for development finance by developers who are keen to get their projects completed before the deadline.
Traditionally, a large proportion of developers would negotiate directly with their bank for finance. But that is changing, not only is the number of specialist funders increasing, the number of developers who prefer to use the services of a broker is increasing too. It’s about knowing the market. Developers are finding it increasingly difficult to keep up with the number of lenders, rates and terms and what lender will finance which project.
The situation has been somewhat exacerbated by lenders’ interpretation of the implementation of permitted development rights. Each lender seems to have interpreted the rules in a different way, so knowing which lender to approach is not easy. What is implementation? Is it full completion of a project including onward sale or refinance? Or is it some lesser test, say, partial completion before the 30 May 2016 deadline?
Lenders are concerned by the Labour Party's stance of not continuing beyond the deadline and will need to be comfortable that, with a planning variation, the projects need to be completed well in advance. The Tory Party has already published plans to extend the current regime should they be in government post 8th May 2015.
At Mortgages for Business, we track the rates and policies of the leading property development finance lenders, taking care understand any changes in criteria. Crucially, we’ve been keeping abreast of how each lender interprets permitted development rights.
This doesn’t mean that securing finance is straightforward but we do always work with developers to find a solution as our case studies demonstrate.
So if you are seeking finance for your next (or current) project and it is subject to the PDR timeline, we recommend that you get in touch sooner rather than later, if you need help securing a workable solution.
As well as the relaxed planning rules, there are many other factors leading to improvements in the sector; Stamp Duty reforms, Government Starter Home initiatives, the new Help to Buy Isa and an increase in finance options are all great news for developers.
With regard to current funding options, we continue to see an increase in lender appetite and product availability.
In 2014, the high street banks started to up their games for experienced developers albeit with a cautious and robust underwriting approach. The challenger banks such as Aldermore and Secure Trust along with established development lenders continue to provide funding for viable development projects.
Some of the established bridging lenders also provide development finance and are a useful option especially if speed is an important factor. At MFB we make it our business to work with all the key lenders in the development finance arena and work with the developer to get the right finance package for the project. The bridging market is becoming increasingly competitive and we are seeing an influx of new short term funding providers as the demand for property finance continues to increase.
As well as the "ground up" developments, we are seeing an increase in refurbishment proposals, small PDR projects and auction purchases, and at MFB we have made sure that we have access to all the main lenders in the bridging space as well as the more tradition development finance route.
We have access to some of the most competitive funding but as experienced developers will know, it is not always about finding the best headline interest rate but finding a lender with the right appetite, flexibility and processes to get the deal done. Our job is to know which lenders are right for each particular developer and project.
For short term refurbishment loans, interest rates start from as low as 0.7% per month for the right deal with lender arrangement fees around 2%. Bridging providers offering full development finance tend to come in at around 1% to 1.25%pm with similar arrangement fees. We are seeing more short term products without exit fees but for full development facilities with tranche drawdowns etc., exit fees generally still apply.
Pricing for full development projects varies depending on a number of factors including location, experience, gearing, speed and flexibility required etc. As I have already said, finance packages for development projects are rarely about price but about finding the right lender to match the developers’ overall requirements and structuring a deal to ensure that the project gets completed as planned.
High Street banks are waking up and for experienced developers with solid track records they will look to fund up to say 60% of costs and around 50% of Gross Development Value (GDV). Rates start from around 4.5% above Bank Rate with arrangement fees of c.2% and potentially similar exit fees of up to 2% of the loan amount.
Those looking for higher gearing are starting to be well serviced by the challenger banks and development specialists with finance available up to 75% of costs. Rates outside the high street start from around 7% pa to 9% pa with arrangement fees and exit fees around the 2% mark. Exit fees are generally a percentage of loan amount but there are still some specialists charging exit fees based on a percentage of GDV.
Stretch funding / mezzanine finance is also available for the right deal and we have lenders who will take additional security if the initial cash stake is limited.
We will continue to keep developers up to speed with progress (or otherwise) in the finance arena. You may find it useful to sign up to our monthly Property Development Finance newsletter. And if you have a project to discuss, please get in touch, we have a great team of consultants with the knowledge and experience to help you find the best solution for your next project.