Financing housebuilding has changed - but the money is out there
The availability of finance for housebuilders is often described as one of the problems in creating more housing stock in Scotland.
However, while it is true to say that some of the traditional sources are drying up, it is also the case that the number of lenders and funders of all shapes and sizes looking to expand into a market which feels like it has more potential for growth than many (retail anyone?) is ever-increasing.
Knowing who they are and what they are offering though is a constant challenge, and there are a wide variety of options depending on type, location and size of development, as well as the covenant of the housebuilder themselves, which is of particular importance.
In terms of providing finance for housebuilding the clearing banks such as RBS, Lloyds, Clydesdale are still active in the market, but their focus tends to be on the larger national housebuilders involved in larger projects. They traditionally offer lower leverage (i.e. amount of debt as a proportion of development value) but also offer lower interest rates as well. Documentation can be either bank standard form or full LMA documentation for higher debt levels which will impact directly on the fees involved.
Many lenders in the market now are direct or alternative lenders (many prefer the term direct to alternative but they are broadly interchangeable) who are looking to grow their lending book in Scotland by financing the right deals with the right borrowers, as always.
They cover a broad range of borrowers and debt levels and generally offer higher leverage than the clearing banks, but in exchange for higher interest rates and fees. They are however often unencumbered by the need to go through long approval processes and can sign off on loans in very short order where necessary to get deals through. Close and Aldermore are active in this market in Scotland at the higher debt levels for the sector, with Aldermore having recently done its first two development financing deals in Scotland. Lender’s like Ortus are at the slightly lower end of this sector and new entrants like Octopus are looking to make their mark and have a variety of things there are willing to look at.
The Scottish Government (through the Scottish Futures Trust) has also been very active in recent years in trying to plug perceived gaps in the lending market, with a variety of schemes having been made available from time to time, including the NHT initiative, PRS Guarantee Scheme and the Building Scotland Development Fund. These are often only available for limited periods of time with limited funds available to be utilised within key sweet spot sectors, but they can be a useful option where other funding is not available.
At the lower end of the market (in terms of debt levels rather than quality of product) are the bridge lenders, who will provide financing for the development phase with the expectation that this is refinanced immediately upon the development being completed, preferably with new debt rather than through sales. This debt is the most expensive of the types listed with higher interest rates and fees and usually only popular on small developments or conversions.
There are various funds who will invest in housebuilding on a small scale as well as entities like the Housing Growth Partnership who will equity invest in housebuilders. High Net Worth individuals and family offices have also done some lending in this area, but this is the exception rather than the norm.
While the landscape for financing new residential developments has clearly changed for a multitude of economic reasons, as long as demand for new homes remains at current record levels there will be lenders willing to fund high-quality new schemes that offer a return on investment.
Developers with well-thought-out plans should be able to get backing for their projects, as long as they are willing to look at all the options.
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