Legal expert Jonathan Newman reckons some short-term lenders have rashly entered into development finance without having the necessary experience.
Newman (pictured), who is senior partner at Brightstone Law, has seen a rise in lenders over-valuing the gross-development-value of properties, which can affect whether they come to market.
He said: “Short-term lenders went into development finance in a hurry probably circa four or five years ago.
“It is quite a specialist area of lending. Sometimes lenders will freely admit that they didn’t necessarily have the experience to get the right technical knowhow in-house.
“Lenders are now beginning to see problems arise which they weren’t expecting mainly as a result of a lack of experience.”
Another issue Newman highlighted is lenders failing to think through the impact developments can have on neighbouring properties, which can lead to complaints.
Lenders can also lose out if the developer fails to use the funds correctly, meaning they commonly have to scrutinise development cases on more of an ongoing basis than with standard bridging.
In all Brightstone Law has seen a 150% increase in ‘problem’ development lending cases in the last 12 months.
Ashley Ilsen, who left development finance lender Regentsmead in January to launch a new one called Magnet Capital this year, thinks Newman is bang on the money.
He said: “In the last 18 months we started losing business to lenders that were over-leveraging in term of loan-to-value.
“That was due to a spill-over from the bridging industry because it got crowded; it forced lenders to go into areas with nothing to do with bridging.
“It’s got a different skillset in terms of underwriting and valuing – hence a lot of them aren’t getting the money back that they thought they would get.
“If you are lending at 65% GDV and you are rolling up fees and that valuation wasn’t what you thought it would be, your loan-to-value is significantly higher.”
Both Newman and Ilsen added that lenders have gotten themselves into even more difficulties owing to the declining nature of the property market in the past few years.
Buster Tolfree, who is commercial director of United Trust Bank, which has separate bridging and development finance divisions, agreed that there is a significant divide between the two.
He said: “Just because you’re good at bridging doesn’t mean you’re good at development and viva versa.
“If you go into development with a bridging mindset it does raise certain risks.”
Association of Short Term Lenders data shows there was £386.1m worth of bridging development lending in the first quarter of 2018, a 22% increase from the previous quarter.
Newman advises lenders to make sure they use experienced solicitors, specialist valuers and knowledgeable quantity surveyors to manage risk.
He added: “I think development lending is double the risk of any other lending. Not only is it the usual loan and security risk, but the ending is likely to be over a much longer-term.
“The risks are two-fold. Who are you lending to and do they have a track record for developing in the character of the development that you are lending?”
Ilsen says the key is having the necessary expertise in-house and understanding the developer.
He added: “A good lender should not rely on partnerships. Any development lender worth their salt will have the expertise in house – you shouldn’t rely on surveyors to tell you what’s going on.
“You need to understand who you are lending to, whether SMEs or builders. You need to understand the delays to building supplies, the way prices fluctuate and their ability to market their product when it’s finished.”
Tolfree added that United Trust Bank manages risk by assigning a business development director who has a close relationship with surveyors and builders to look after the project from start to finish.