‘Merchants’ move in to help UK housing sector develop

Survey shows the extent of non-bank lenders’ role in resi funding, writes William Newsom

How the market has swung back up! At the bottom of the downturn in 2009/2010, it is said that no one was prepared to lend, whereas today Savills can identify at least 57 active providers of residential development finance (RDF) in the UK.

This statistic is based on a June 2014 survey of more than 70 organisations, more than 57 of which confirmed that they are lending. This compares with 37 in a survey a year earlier.

Of the 57 lenders, around half comprise what could be termed ‘merchant lenders’, rather than banks: senior debt funds, mezzanine funds, hedge funds, asset managers, corporations with surplus cash and property companies. Most of these are unregulated in their lending activities.

REC 10.24 p 38 picap


The list includes only one insurance company, Cornerstone, on behalf of US client MassMutual, and three peer-to-peer lenders: Assetz Capital, Wellesley & Co and Montello, which lend in conjunction with LendInvest.

Over the past 12 months, ‘merchant lenders’ have significantly increased their level of RDF business and this follows separate analysis showing that this group increased their market share by more than 100% between 2012 and 2013.

In addition to the 57, another eight organisations are discreet providers of RDF but do not wish to be highlighted. These  are mainly UK and overseas private banks that focus on relationships, rather than pursuing deals, and whose customers they support across a wide range of activities.

Back in 2009/2010, just two organisations were open for such lending: Barclays Bank and Close Brothers, which are rather like the ‘big daddies’ of RDF.  Today both are very active and figure in the tables of the top 12 biggest ticket providers of RDF and the top 20 smaller ticket providers.


Mezz and senior covered

REC 10.14 p39 Table 1The survey includes both senior and mezzanine debt providers. Pure senior debt loan-to-value ratios usually range from 0-60%, where the lender takes a first charge over the asset, based on gross development value. Mezzanine will be the next slice, from 60-80% loan-to-value, with these lenders taking a second charge over the asset.

As in other finance markets, people increasingly refer to ‘stretched senior’ and ‘whole loans’. Stretched senior is where the first-charge holder is prepared to provide debt above 60% LTV levels, with the pricing reflecting the added risk.

Perhaps the best description of ‘whole loans’ comes from one provider that says: “We are writing a lot of ‘whole loans’ where we lend up to, say, 70-75% of gross development value, as a two tranche facility, senior plus mezzanine; afterwards we either hold the full loan on balance sheet, or sell  the senior tranche and retain the mezzanine.  Pricing varies depending upon loan-to-cost level, the quality of the scheme and the borrower, pre-sales etc.”

LTV and LTC levels available in the market have increased in the past 12 months. In the June 2013 survey, senior LTV ratios (including stretched senior) were generally in the 50-65% range; today, they are at 55-70%. Similarly, LTC ratios have risen five percentage points over the same period and 90%-plus LTCs are obtainable if the scheme’s fundamentals are good enough.

Residential development finance is complex and so it is not straight forward to generalise about pricing, as it will be a blend reflecting a variety of factors: eg. property fundamentals, location, local demographics, proportion of pre-sales, depth of customer relationship, track record and financial strength, competition between lenders, absolute level of gross development value, loan size, LTV/LTC and other loan terms.

De Montfort University’s last full-year real estate lending survey, covering 2013, reported that the average senior debt margin for RDF was 432 basis points, but with a wide range from a minimum of 150bps up to a maximum of 800 bps.

Senior debt margins down

How much business is being done at the latter level of pricing and the level of appreciation of risk at the former is open to question. Having seen the full range of pricing at Savills, we can say that today the average has fallen to nearer 350-400bps.

Most lenders also seek fees on the way in (usually 1-1.5%) and fees on exit (usually 1-2% of the loan amount). Some lenders are driven by internal rates of return (IRR), with returns having reduced significantly; 8-12% is the new 12-18%.

An IRR is constructed from a variety of inputs. As one IRR-driven lender stated, it is “agnostic as to how the IRR is constructed and can consider combinations of running/payment in kind/fees/profit share”.

Who are the mezzanine providers and what level of pricing do they offer? Pramerica provides “subordinated, preferred capital at 12-18%, dependent on deal specific factors”; Contour Capital reports pricing in the “mid 20s”; Pluto Capital “has all bases covered” at pricing of 2% per month; while Assetz Capital’s pricing is at a similar level.

Strata Fund, advised by Davon, provides RDF at a simple 30% per annum, payable on the running outstanding balance. Some may consider this extremely expensive, but Strata argues that “30% per annum should be regarded as cheap equity, not expensive debt, that saves developers giving half a profit to an equity investor”.

In terms of location, however, many lenders are just focused on London and the south east. More interesting are those that will lend elsewhere in the UK. Seven lenders, mainly the UK clearing banks, say they will lend anywhere in the UK, while another 10 say they will lend in the major conurbations or strong regional cities and counties.

All parties are choosy about who they lend to and generally lenders seek three main features from borrowers: proven track record, financial stability (with the ability to fund potential cost overruns out of cash resources) and some form of personal recourse or guarantee.

Help for smaller developers

REC 10.14 p39 table 2This seems to favour major and regional house builders, but 11 lenders, including Barclays, NatWest and RBS, are prepared to help smaller developers.

Commercial Acceptances “predominately works with sole traders and small to medium-sized enterprises”; Investec is “looking for new clients with experience”; Richmond Securities lends “typically to one and two-man bands”; and Titlestone is “really serving the small developer”.

Finally, while a year ago, just five lenders said they would consider lending where there is planning risk, incredibly, Savills can now name 20.

However, all lenders remain very cautious, usually seeking one or all of the following: a developer with good experience; full visibility in the form of a planning consultant’s report; a good case for consent; and some underlying value in the existing use. Such lending is on terms reflecting the risk being taken and necessarily at modest gearing, eg. 40-60% of existing use value.

The RDF market has very much recovered since the dark days of the downturn, with most UK projects having the potential to find a lender that will quote. But let’s not get carried away; it will usually be on commercial and prudent terms, with some lenders more prudent than others.


William Newsom is a senior director, valuation, at Savills. Go to back issues at recapitalnews.com for profiles of residential lenders Titlestone (Sept 2013), West One (June 2013) and Urban Exposure (May 2013)