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Development finance is not without risks

One of the main issues is in the mind-set behind lending someone else’s money. I can refer back to the old adage that anyone can lend money, the skill is of course making sure you get it back.

However as many lenders will have investors to appease they are under pressure to lend and grow their respective loan books. It is when this pressure sets in that mistakes can happen and funders start lending on higher risk properties or providing funds at LTVs that aren’t sustainable.

We have seen several years of growth in the property market meaning that an inevitable downturn could come sooner than some may expect. Without sounding too much like a doom-monger I think it’s important for new entrants to compete on the right battlefields and offer something genuinely new, innovative and different in order to secure market share and not fall into old habits of chasing the market in terms of rate or LTV.

It is of course already a very saturated market place and it looks as though there is currently an oversupply of funding available in the sector. Another by-product of this is seeing lenders who traditionally provide bridging finance try their hand at development funding.

Some will no doubt do it well, but we have already seen examples of this going very wrong and this can at times reflect badly on the industry as a whole. It will be interesting to see how this continues to manifest as established lenders and new entrants alike try to find gaps in the market. I’m not entirely sure why but development finance is for some reason perceived as being a natural extension of bridging.

Development finance is without a doubt a higher risk form of funding as the banks have found out the hard way. There are endless things that can go wrong on a development project from legal aspects to planning issues or building related problems and knowing how to deal with these comes only with experience.

It’s when things go wrong that lenders show their true colours and simply liquidating the asset or relying on insurance policies are not long term viable solutions. When there a problems with a site a lender will need to step in and resolve the issues and this is done through experience and an existing networking of professionals or contacts to
call on.

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