Secured Lending for Property Developers projects

[Mezger]

I have no desire nor skill to do Property Development, but keen to understand those that lend (secured) to Property Developers.

Does anyone here provide finance to Developers via Bridging loans?
How does it work in practice, what rates are achievable, how do you 'secure' your loan - via first charge?

Keen to hear from those with real world & recent experience.

I have some funds I am able to invest but only for 18-24mths - so too short a timeframe to pile into Index Funds (my first port of call)..

Thanks in advance!

[PoorCarCollector]

The short answer is don't, For 18-24 months go with a gilt or similar. Guaranteed returns and CGT free.

I've been in joint ventures / funded a number of property development projects in the last 15 years, they very rarely operates on anything like the timescales you are looking for.
Those that run on time are generally are done by experienced developers who already have funders they use.

I'm in a '24 month' project currently which is coming up to 5 years now. Planning enforcement / delays, contracters going bust etc

Especially in the current economic slowdown, I would strongly look elsewhere for your timescales

Edited by PoorCarCollector on Monday 1st July 08:48

[Mezger]

Thank you, sounds like sensible advice.

Based on your experience, whilst timelines might get extended, have the returns been worth it?

[blueg33]

How much have you got to invest? I have a project with a clear 2 year payback.

I need £5m. Yield will be circa 8% based on a land turn prior to comment of construction. If it goes wrong, you own a field.

[tight fart]

Friend of mine does it, he was on 1% per month.
That was before the bank rate increase.

[Mezger]

blueg33 said:

How much have you got to invest? I have a project with a clear 2 year payback.

I need £5m. Yield will be circa 8% based on a land turn prior to comment of construction. If it goes wrong, you own a field.

400-600k, I've always wanted to own a field ;-)

This may sound naive but 8% yield feels low given where interest rates are, I'm (assuming) commercial lending rates are above UK base rate?

[PoorCarCollector]

Mezger said:

400-600k, I've always wanted to own a field ;-)

This may sound naive but 8% yield feels low given where interest rates are, I'm (assuming) commercial lending rates are above UK base rate?

Yes. if you're only looking to invest this sort of amount, you'll struggle to get a decent return, unless super risky

The likes of Catalyst Property Finance and similar companies offer loans at around 1.6% per month on an an 18 month term
They are very strict with their conditions, offer an LTV of around 65% max and often want personal guarantees etc

I would think you may get 8-12% with 1st charge on land/property, but it's finding someone to work with, the market is full of conmen......

It's worked well for me in the past, but that's with a rising and very active market etc. I really wouldn't be keen to start now, with no experience and tough times ahead

Edited by PoorCarCollector on Thursday 4th July 07:15

[blueg33]

Mezger said:

blueg33 said:

How much have you got to invest? I have a project with a clear 2 year payback.

I need £5m. Yield will be circa 8% based on a land turn prior to comment of construction. If it goes wrong, you own a field.

400-600k, I've always wanted to own a field ;-)

This may sound naive but 8% yield feels low given where interest rates are, I'm (assuming) commercial lending rates are above UK base rate?

The 8 percent is your share of the increase in land value as a result of my efforts. Land would be forward sold. You would also get a share of development profit if I did the build too.

Funds generally charge me around 8-10 percent for development finance

[bigmowley]

blueg33 said:

The 8 percent is your share of the increase in land value as a result of my efforts. Land would be forward sold. You would also get a share of development profit if I did the build too.

Funds generally charge me around 8-10 percent for development finance

Same here. My current development funding is at 9% effectively it’s P2P lending. No banks

[blueg33]

Op. It may be worth you looking at Shore Capital’s Puma real estate funds. They invest in uk development. I’ve used them to fund developments in the past.

The problem you have is that the amount you are talking about whilst being a lot of money is nothing in development terms.

[isleofthorns]

I get about 10% with a local developer.
first charge and PG
monies released in stages against set criteria


given this is taxed, gilts can offer almost as much net without the bother.

if you don' have any experience in the build / development process, I'd probably give it a miss.

[blueg33]

isleofthorns said:

if you don' have any experience in the build / development process, I'd probably give it a miss.

This good advice. Its high risk if you dont' understand it

[ooid]

Mezger said:

I have no desire nor skill to do Property Development, but keen to understand those that lend (secured) to Property Developers.

Does anyone here provide finance to Developers via Bridging loans?
How does it work in practice, what rates are achievable, how do you 'secure' your loan - via first charge?

You can search for 'debt funds' that invest in real estate developments in U.K. They would have various funds for specific development or refurbishment projects. They do have all professional due diligence and set up ready to control risk.

[ooid]

isleofthorns said:

I
given this is taxed, gilts can offer almost as much net without the bother.

if you don' have any experience in the build / development process, I'd probably give it a miss.

I would agree with this. Beyond Gilts, also have a look at 'convertible bonds' of well-known REITS in U.K.

They -REITS- are simply developers that listed in FTSE, and they would be ultra professional. They do sometimes issue 'convertible bonds' for new projects, so you would simply buy these, while collecting coupons, there would be an option to convert them to share. ( you will have upside exposure)

[Wilmslowboy]

My friend does property development, and I end up doing some his business models for him, so got to know the numbers.

It’s all about the risk level and security

I tend to see, three levels of lending

A) Up to 80% LTV of purchase – 1% fee (in and out), 0.75% a month rolled up to the end (1st charge - pretty much as secure as you can get)

B) 80% to 100% of purchase - 1% fee (in and out), 1.5% a month rolled up to the end (2nd charge – medium risk)

C) Development loan (planning/ building, legal costs etc) - Profit share, expected at min 20% annualised return.

He did a deal start of the year, property for development was £850k buy price.
Single private lender put up £1M (covered purchase, fees, legals, planning and lite refurb)
Lender gets small interest charge and 50% profit share.
On track to return just over £1.350m to the lender before the end of the year (10 months) – so around 40% annualised.
(Most of the value in this deal came from getting the planning to split the lots)


He has just about to go to mkt with another opportunity.
Stables (he has owned for nearly a decade and recently managed to get 'commerial/ office status' on, but needs some cash out) Valued at £300k
Looking to raise 100% LTV, for 1st charge and 50% profit share when (IF) he manages to get residential planning. At which point they should be worth circa £750k

So £300k in and around £500k out between 12 to 24 months OR if no planning (including on appeal which can take 24 months) perhaps £250k back (~£50k loss, sell as stables, less costs, etc)

[ooid]

Wilmslowboy said:

So £300k in and around £500k out between 12 to 24 months OR if no planning (including on appeal which can take 24 months) perhaps £250k back (~£50k loss, sell as stables, less costs, etc)

Does lender gets periodic valuations during projects in that nature? I mean that assumption (300k) valued existing land+Building, for instance what if the quarterly valuations somehow show increase or decrease? In the first 3 quarters?

[Wilmslowboy]

ooid said:

Does lender gets periodic valuations during projects in that nature? I mean that assumption (300k) valued existing land+Building, for instance what if the quarterly valuations somehow show increase or decrease? In the first 3 quarters?

No ongoing valuations, unless things change, such as some part of the planning is granted and therefore some uplift in value can be recognised (and only then for the purposes of re-financing).

In the example I cited, friend bought stables nearly a decade ago (for half todays value), with an aim is to get full residential planning. He managed to get commercial status so far (plus some local wider restrictions have been lifted), both these takes him a step closer.

£300k valuation is based on current status, agent opinions, multiple of rental income and some recent local sales. The only thing that would materially change value is further granting of planning (and the conditions that planning comes with), any small swing in mkt value are irrelevant to the deal.

[ooid]

Thanks, in my experience independent lenders a bit more rigid on these terms. They could do quarterly valuations and if there is drop, they would ask margin-call and etc...

I guess also more project and client specific, with risk parameters. I remember some even used to apply quite harsh margins and terms, if the developer could not secure bank lending in the first place.