Category Archives: Banking

Property development funding

The government like many builders and property developers is keen to get Britain building again and has identified a number of large development sites that have stalled simply because of a lack of suitable speculative property development funding. The government is looking to provide some of this much needed funding although the details have not been fully released. The funding shortage will be either in the form of primary funding the usually standard type of development funding currently available on the majority of site at around 55-65% of the loan to value. The second and less secure type is mezzanine funding this is a secondary and more complex type of development funding. It sits on top of the primary development funding and tops up the short fall usually taking care of the percentage difference between the maximum loan to value and a shortfall on the primary development. It is sometimes used to take care of the cash gap between paying the main contractors JCT stage valuations and the sales of the properties. Mezzanine funding often makes the difference between a development taking place and simply not being built out. However this type of development funding is considered risky for the investor as well as being an expensive solution for the site developer. The typical charges are between 25-40% of the investment required and this is usually the first monies to be realised after the primary development funding has been repaid from the sales of the properties. The developer who borrows the mezzanine funding usually also picks up all the soft costs like legal contracts and the mezzanine funder may ask for a directorship or other control of a SPV or special purpose vehicle or limited company used to run the development. It can also be beneficial to the developer because often mezzanine funder will have extensive property development experience and be able to give advice on contractors and with build specifications and off plan sales.

House prices set to rise in 2013

Many property pundits and property professional like to make predictions on the future of the UK property market and house prices. There are also a number of banks and economists that are prepared to put their reputations on the line and estimate where the average UK house price will end up. These projections rarely vary greatly but some have proved far more accurate than other particularly after the last property boom. Amongst one of the best respected and accurate is the Royal Institute of Chartered Surveyors. They do have the advantage of having so many members who have the unenviable task of valuing people’s homes and properties. For the new year of 2013 they are predicting a rise in house prices of around 2 percent which given the economic landscape is a positive and sustainable increase. They are also tipping an increase in transaction volumes with the number of property sales thought to rise by a around the three percent mark edging them tantalisingly closer to the million sales marker. This is still a far cry from the heady days of average number of transactions edging up towards 1.7 million at the height of the property boom in 2006.

Raising a roof

Many home owner look at doing a loft conversion but some properties are less suited to a loft conversion than others. This can often be the case with some bungalows either the pitch is simply to shallow or the ridge of the roof is too low. Even if you can stand up in your loft and the head height is a little tight with the addition of loft insulation bringing the ceilings down and an increase in the thickness of the floor joists it can still be unachievable to convert the loft. However it can still be the best value project for that property so what is the answer? You need to raise the roof this can be done by simply taking the roof off and replacing it with a roof with a stepper pitch and an increased ridge height and therefore more standing room. Or staying with the same pitch and increasing the wall heights to move the whole structure up and give more height or a combination of the two. This usually gives rise to the need for structural steels in the ridge to give the roof more strength and allow for the removal of trusses or other supporting timbers or masonry columns. It will also be likely that you will require steels in to support the new floor structure. This has the advantage of reducing the spans that the floor joists have to make meaning that their depth can be reduced and this again helps with head height. It also makes it easier to get workable stairs and there are various building regulations relating to the depths of the stair risers and the length of stair treads. It is also important to maintain the stairwell ceiling height which is made easier to achieve when these works have been included in the conversion. This does mean more materials and extra work and labour charges but can be well worth while in certain properties particularly those that are set in areas that has high re-sale prices. If you can turn a standard small three bedroom bungalow into a two story house the value of the property can increases dramatically. With all the space down stairs now being able to be utilised as living space you get the added bonus of a large property down stairs. Although this type of building project is too ambitious for most home owners done by the right building contractor they create some amazing houses that command a premium price.

Speculative property development funding available?

This area of bank lending has been one of the least favoured sectors of bank funding in recent years as banks have looked to repair their battered balance sheets and reduce their exposure to property backed lending. A recent survey of European Property Finance trends has seen lenders surveyed increase their likelihood to lend. With three quarters reporting they expect to finance some form of speculative development funding in the next five year period. As always those with the best track records, prime sites and pre-let or sold developments would be their favoured lending targets. Ultimately the banks know that speculative property development can deliver stellar profit gains that allow for developers to pass some of the gross development margin back to their bank financers. So as always in this stage in the property cycle the banks return in search of profits and gentle ease back into an area of the economy that has proven to provide good returns for savvy developers and bankers over many years. It is the speed at which bankers and investors can enjoy their profits and returns, with most speculative building development projects taking between a year and two years to complete. It means that banks and investors can enjoy returns well into double figures quickly with the advantage of a first or second charge of security over a valuable asset. Will this change in attitude now make it easier for builders and property developers to obtain speculative development funding as well as kick starting the property and construction industries?

Selling your home to first time buyers

It is estimated that a third of potential first time buyers are trapped in rented accommodation many of these home buyers have experienced difficulties in completing purchases due to the lack of suitable mortgage funding. Research from the Royal Institute of Chartered Surveyors has showed that nearly forty percent of first time buyers are simply unable to afford to buy a house. It is estimated that twenty percent of home buyers are stopped from buying a house by the lack of mortgage funding. The government backed Newbuy scheme only applies to new built homes many of which are often out of reach of first time buyers. Many in the property industry believe that if the scheme was extended to second hand properties it would provide the mortgage funding to allow first time buyers to get onto the property ladder and therefore kick start the housing market from the bottom up. Many home owners who are looking to sell should consider imaginative sales structures that allow first time buyers to obtain a suitable mortgage to allow them to buy their homes. Mortgage lenders are wary of gifted deposits and long stop completions but there are other methods that allow home owners to get their buyers in place. It is possible to offer the option of buyers renting your home before they buy and paying you the deposit in installments before they buy along with some rent. This can give first time buyers access to mortgages with a lower loan to value rate and the availability of mortgages at a 90percent loan to value is much higher than 95 percent loans.

Main contractors for new build developments

With the current drought in development funding banks and other speculative development funding lenders and brokers are advising that sites be completed as a single phase. In the past it has been possible for smaller developers to build out individual plots or stage developments over one or two plots to improve cash flow through the build stage of a development process. However as banks and other development finance lenders look to mitigate their risk and get their funds back quicker they are increasingly looking to build out whole sites rather than staging the project. They often look for a single main contractor to be signed up under a JCT or similar building contract to ensure the build is carried out quickly and efficiently to achieve end sales and the return of their funds. It does make a build easier and often more cost effective as a composite price for the development is often a good way to reduce build costs, risk and ultimately increase development profit. With the world of construction slowly awaking from its slumbers of the previous few years when new build rates have fallen to record lows. The main contractors are looking forward to dusting off the pricing software and hitting tender deadlines. The advantage of a JCT contract with a building main contractor is that it allows for cost certainty with a fix time scale and pre agreed programme for the build stage of the development. These days many main contractors package up the various elements of the build and subcontract these elements or packages to specialist contractors. So the foundations go to one contractor then the superstructure to another, then roof works and on to the fit out and external finishing. Usually with some of the building main contractors staff supervising the build either as site or working foreman depending on the size and complexity of the building contract. The building contract is awarded after the tender process has been completed. These tenders contain all the working or construction drawings allowance for preliminaries and provisional sums for specification items in the form of pre-contract sums for items like kitchens and bathrooms. These items are then removed from the contract sum on the contract commencement and then added back in after these items and costs are confirmed after the contract is underway.

What will happen to house prices?

House prices continue to stumble along with small movements up and down giving neither comfort to the optimists or pessimist. Indeed the same data is often used by both camps with negative data being picked up as continuing pent up demand and the pessimists suggesting that it is because of a lack of demand. If you look at mortgages which have a huge impact on the property and construction sectors you can see both positives and negatives. Mortgages are cheap with low interest rates and good fixed rates available however this is offset by tight lending material. Even though house prices are static it is still an achievement considering the wider economic backdrop. The bank of England has recently continued with its position of low rates and increase quanitive easing with more moves suggested soon to keep inflation on target. But the key is mortgage criteria and money supply when banks have access to cheap money and an increased supply they feel they are in a better position to lend. To increase lending they will relax lending criteria and the upward cycle begins. When lending criteria is relaxed more people can both practically borrow at the same time they have the confidence to borrow. The opposite is currently happening with property buyers and property developers less excited about buying assets that could fall in value while loans become harder to come by. It is interesting that new built homes and developments are seeing price rises against all odds. This is probably due to the recent low build rates in the UK making new homes much rarer than in the boom years of the mid 2000’s when every city’s skyline was peppered with tower cranes. Some economists are now predicting a fifteen percent increase in house prices over the next five years believing that the low supply rates will drive capital values higher.

New build sales increase

The largest volume seller in the UK house building and property development sector has showed a 14 percent rise in sales. The company has also seen the sales prices agreed rising pushing up the gross development value of their sites and in turn the profitability of these sites. Maximising the returns for investors and increasing confidence with their lenders. They have also reported forward sales increasing by over a third. This is further good news for the property and construction sectors, giving work for building contractors, construction professionals and property related businesses. Money that enters the construction industry is known by economists to have a very positive effect on the wider economy. There are still opportunities for investors and speculators to obtain bargain sites and development land as there are still distressed sites coming to the market. Some developers and land owners who entered the down turn with heavily geared borrowings are still in some cases being forced to let sites go well below the levels that they purchased sites or borrowed against them. Construction and building companies that specialise in refurbishments, renovations and building extensions have in some cases seen their market grow. They have however seen more competition in the tender process as companies and building contractors who have been forced out of the new build market have moved into this sector. Like with all businesses those who have a proven and strong track record have weathered the storm and are in a strong position to take advantage as the market conditions improve.

Property REIT’s to assist on social housing targets

Property REIT’s the investment vehicles that allow institutional investors and private investors to move their funds into property to back social housing and other income generating property investments. Will assist in hitting social housing targets but will not replace pound for pound the cuts made by the government in social housing funding. As with all investments the focus is always on the risk and return available and many believe that this highly regulated sector may not give big enough returns to attract investors to the sector in the volumes that are required. Investors are wary that political change could have a direct and potentially damaging effect on their returns. The government will be reluctant to guarantee or grant fund this type of investment particularly following recent issues with pubic private partnerships. It is of no doubt that relying solely on funds from property REIT’s will mean that fewer new social houses will be built. This will also have a negative effect on other sectors of the economy like construction where a down turn in output has already affected jobs and investment. With such low build rates the government is doing the right thing in looking at more imaginative funding options for property development and regeneration. However this cannot be seen as a magic bullet to solve the lack of new build properties available.

First time property buyers hits highest level for 3 years

Data from rightmove has shown the number of first time buyers looking to purchase a property in the next twelve months has hit its highest level for three years. Interestingly this now also makes up about a third of all buyers looking to purchase in next year. Despite the woes of the wider economy there are more and more encouraging signs coming from the property market. Although nobody expects a sudden boom in the property market many believe we are out of the worst of it. The low UK new build rates and a pent up demand over the past few years seem to be driving the market and stabilising market conditions and prices. The importance of first time buyers to the rest of the property market is well documented. First time buyers are the property markets life blood and allow the first time buyers of the past to make their natural progression up the property ladder to larger and more expensive homes. It is great news that those first time buyers looking to buy in the next year have also hit the highest level since rightmove started to measure the data back in 2009. The number of first time buyers looking to purchase is a good key indicator of future property market performance and is bound to put upward pressure on house prices. Once prices start to move up in a regular pattern it has a snowball effect on market conditions. The property market does rely on market fundamentals like the availability of mortgage funding but is always driven by sentiment. Once home buyers start to have concerns that house prices are rising in their areas and they may be priced out of the market. They will buy more quickly and may be forced to consider other areas. This is often referred to as the ripple effect as buyers start to widen their searches and this stabilises the secondary and tertiary market areas. Before the credit crunch the number of first time buyers was running at around 40 percent of home buyers. The signs are that we are returning to more sensible levels of first time buyers. With the banks and other mortgage lenders repairing their battered balance sheets it is all starting to come together. So conditions for a slow and sustainable recovery in the property market are possible. This is also good news for the construction sector and building contractors. Many home buyers and sellers look to make alterations and start building projects to either prepare their properties for sale or change their new home to suit their needs and lifestyle choices. The other benefit to the construction industry and property developers is not only the opportunity to get their end sales from first time buyers but also from those who sell to first time buyers. Many new home buyers have been waiting for the allusive first time buyers of recent years to release them from their homes so they can trade up the property ladder. First time buyers are often less concerned about taking on properties that need work and development as they would rather compromise on the condition of the property rather than its geographical area. This also releases those who are looking to down size from family homes to smaller retirement homes. Many home owners who retire are looking for new low maintenance homes that allow them to enjoy their time and income rather than spend their limited resources on maintaining larger period properties.