Bridging lenders may not be the best choice for development financing

If you’re looking to finance a property development you’ll find that a number of new development finance providers have launched on the market in the past year, many of them being bridging lenders.

Although this seems great news for developers there has been a significant product shifting which could cause problems. Developers appreciate having the ability to access decision-makers when applying for loans and knowing they can trust their lender to perform at high levels, which is not always the case with some of these new providers. Many bridging lenders have moved into the market for development finance because costs of borrowing for consumers looking at bridging loans have fallen dramatically. In most cases these bridging lenders only have a static cost of capital (when compared to markets), so the cuts to their rates can result in tight margins and cuts in profitability. Lenders offering development lending can provide better returns than bridging lenders in the modern market which is why bridging providers are so attracted to the development sector.

In all the trend towards bridging lending may have a detrimental effect on developer’s experience within the lending sector, as it could be compared to a commodity whereby borrowers seek out the lender offering the best prices or loan-to-value (LTV) ratios. It has to be said that development loans are likely to be much more complex than this, and there is a requirement to factor in risks before making any kind of advance on land.

Lenders also need to look at factors like loan-to-gross-development-value ratios; the developer experience; loan-to-cost ratios; the types of development taking place; likely construction methods; as well as the planned route for procurement. All these factors mean bridging lenders are not the ideal choice for the complexities of the development market.

Where brokers and borrowers do opt for bridging loans from providers with insufficient expertise, it can be that they appear cheaper or offer greater leverage but they tend to be structured in ways that can harm the progress of development projects. For example, some lenders adopt an aggressive approach when projects overrun on completion date or if drawdowns are valued by RICS ‘red book’ valuers opposed to project monitoring quantity surveyors. This can prove to be absolutely devastating for developers, as regular cash is a continual requirement.

A further consideration is that bridging lenders tend to be more remote throughout the life of loans, so they may not be experienced in spotting early warnings that projects are hitting trouble. It’s important that developers remain on the ball throughout the development process, as this maintains focus.

In conclusion, it’s critical that borrowers seeking development finance consider the whole package on offer, and don’t just focus on LTV ratios or rates. In many cases opting for dynamic, flexible lenders with expertise in the field can be essential.

Panoptic can provide developers with lenders tailored to meet their needs exactly get in touch for details.

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