Game of Loans: The Devil is in the Detail
As soon as I think we have reached the maximum number of development lenders in the market, there always seems to be another round of new and existing companies that start to offer development finance products. In fact, this is a positive thing for the industry as, in theory, more competition should benefit the customer with lower prices and better products.
However, we are always subject to the usual market externalities and uncertainties that arise from changes in British politics. We always have the very real possibility that inflation and interest rates will rise in the near future.
No Change To The Industry
Regardless of external economic factors, the practices and structures that we see in the development finance world remain largely unchanged. Every lender or funder has a different approach to funding development projects and they all have their strengths and weaknesses. The end result should always be to provide maximum liquidity for the developer to enable the smooth and successful running of their project.
Lenders still need to consider all the things that potentially go wrong with any property development project. The great thing about development funding is that there are a million and one things that could go wrong, from an increase in build costs to an ecological issue such as bats and newts on site. Being able to pay close attention to detail and allow for any contingencies is what separates the good lenders.
What we learn from The Big Short
I was recently on a long haul flight where I enjoyed watching The Big Short; a dramatized film starring Steve Carrell and Ryan Gosling of how the 2007 credit crunch was triggered by adverse mortgage lending the United States. There is a scene when, before all hell breaks loose, the officials start to investigate some of the sub-prime mortgages at the time by a very simple method: they went and looked at what was being lent on.
Whilst development funding is very different to a typical mortgage, the lending principles are still the same. All good lenders should look at what they are lending on, taking into account the opinion of our surveyors but also combining our own wealth of experience and knowledge. This has required me to go through suits at an alarming rate as I visit our development sites regularly and step in all kinds of mud and building material.
We see every site that we lend on; meet the client face-to-face and nothing gives you a better impression as a lender that seeing the project in the flesh. At Regentsmead we have developed a traffic light system of basic indicators to look out for on-site and ensure that the project is running smoothly. Of course, not everything will get picked up beforehand but a good development lender should at least have sensible practices in place such as these.
There is no one-size-fits-all when funding a development scheme but everything we have learnt and executed at Regentsmead is a product of the test of time. We have experienced various issues in the past, like any other lender, but this is the nature of property development funding. There is no alternative to having experience, something that we have had since 1934. I hope that our fellow development lenders can share the same sentiment. Detail is everything in our world.