The increasing importance of development exit finance
Updated: Jul 15, 2021
In the last three months a lot has changed for all of us. For property developers, the realities of lockdown and the impact of ongoing social distancing measures has provided its own challenges. In many cases there has been the need to amend plans and come up with new alternatives. For many, development exit finance is part of that new plan.
What is development exit finance?
Development exit finance is a form of bridging finance; short term lending that is used once a development is completed, or near practical completion. There are 3 primary benefits to development exit finance:
It gives the developer time. There are commonly, tight deadlines on development finance terms, and once the project is completed there may be only a limited time to sell the unit(s). Development exit finance gives the developer time to sell the assets without unnecessary pressure.
Capital tied up in the project can be released. This can allow the developer to invest their capital in the next project prior to the sale or long term refinancing of the asset(s). There is also the added benefit that development exit finance typically offers the developer the opportunity to keep part of the proceeds of sales made, whereas development finance requires the whole amount to be paid back before any profits can be retained.
It can be cheaper than development finance. Development finance rates reflect the risk associated with such a project, but with the project now approaching completion, the developer can move to lower rate, therefore protecting profit margins.
What are the key features of development exit finance?
Whilst lenders will assess each case individually, in order to determine the terms offered, there are common features for development exit products:
Finance typically up to 75% loan to value (LTV), although this can be up to 80% LTV with some of our lenders
Finance available from when the property is wind and watertight
The option to retain part of the proceeds from sales
Rolled up or retained interest (meaning you don't pay monthly) or serviced interest
Some facilities may offer no exit fees or early repayment charges (ERC's)
Fast completions, as with all forms of bridging finance (generally 2-4 weeks)
Terms up to 36 months
Why is development exit finance important now?
COVID-19 has had such an enormous impact on our lives over the last few months, and that is no different for those in property development. The initial impact of site closures has meant that projects have been set back, and the ongoing rules of social distancing mean that sites can not operate to full capacity. The old adage that 'time is money' has never been more true for developers with expensive development finance on delayed projects.
In addition to the pressure of development costs, there is the current uncertainty surrounding property prices, and the ability to sell the asset(s) once completed. Savills, only last week, stated that their 5 year outlook had not changed, but that the phasing of how the market would perform over that period had been revised. As we come to terms with a recession, the end of Furlough, the end of mortgage payment holidays and higher unemployment, in the short term at least, property prices can be expected to drop or at least stagnate.
These conditions make the benefits of development exit finance all the more appealing. Developers can potentially move to a lower interest rate before the project is completed, not have to service the debt on a monthly basis and then take the time to assess the market and stand an improved chance of securing the sale they desire. The developers cash flow can also be improved through the release of capital to be invested in the next project.
How can we help?
The present circumstances are undoubtedly more challenging for developers than 6 months ago, especially for those that are having to navigate these unique times with ongoing developments. As an independent broker we have full market access in order to see that the keenest terms are achieved for you. With many lenders revising their product offering to reflect the current economic uncertainty, we have access to lenders who continue to back the right projects with highly competitive terms.
If you have a specific case to discuss please get in touch.
Please feel free to share this blog.