In an article produced for FIBA Advantage magazine, we discuss the challenges property developers have experienced due to Covid and Brexit, and how development exit finance can be a real solution.
Over the last year, development exit finance has played a crucial role in the specialist lending market.
This type of finance is a short-term loan and is used to replace an existing loan agreement which has been used to develop a property or multiple properties. Simply put, development exit finance provides the borrower with the opportunity to release capital from their completed project while they await for the development to sell.
At times, sales can stall or fall through, leaving the borrower in a tricky position to meet their existing finance obligations while ensuring they have a solution to keep their investment plans moving forward. One of the main benefits of development exit finance, is it provides the borrower with additional time and can relieve any pressure to pay outstanding capital back to the lender, if for whatever reason they are unable to do so on time. In addition, moving onto a development exit finance product usually also means that the borrower will be able to take advantage of a lower interest rate.
Similar to a bridging loan, development exit finance provides the same features, i.e. access to short-term finance which is provided extremely quickly to meet the individual needs and requirements of the borrower.
Owing to the dual impact of Brexit and Covid-19, investors and developers are eager to find a solution, to ensure their investment plans keep moving. In the current economic climate, there are many set-backs in the development process due to demand for building materials and labour. Investors and developers tend to rely on development finance to fund a project, whether that involves covering the cost of building or renovating a property. However, when the completions don’t happen as intended and the deadline to pay back the loan is missed, this has a huge impact on the profitability of their development, if they are not in a position to exit their existing finance obligations.
Subsequently, development exit finance is playing a crucial role in providing a lifeline, by enabling an opportunity for borrowers to raise capital quickly and finance their next project once their current development reaches practical competition.
Recently, specialist short-term lender Hope Capital, launched a brand-new product designed for residential development exit, offering up to 80% LTV. This development exit finance product enables borrowers who are in a position where their completed residential development is prepared for sale, to switch to a short-term, lower-cost funding option. The purpose of the product is to provide the borrower with additional time and to relieve any pressure to pay outstanding capital back to the lender if they are unable to do so on time.
The key features of Hope Capital’s new development exit product include:
- Interest rates start from 0.69%
- A maximum loan-to-value of 80%
- 3 – 18-month term
- Available on loans from £150k to £5m
- Up to 80% OMV considered
An important factor a lender such as Hope Capital will consider when they are looking to release funds, is that the client has robust plan to sell the properties in a timely manner or can refinance and is therefore able to exit the loan. Ultimately, this is how the loan will be repaid at the end of the term. In the current buoyant housing market, sale of the properties is typically a solid exit strategy. However, if the exit strategy is not achieved, the borrower will need to be able to react quickly and flexibly to the changing situation, such as refinancing the existing units on to a long-term solution.
It is therefore crucial as the market begins to recover that there are options such as Hope Capital’s development exit finance product, which provides brokers and their clients with competitive, flexible and favourable solutions to meet this need.
Overall, given the above and current climate, it is very likely the demand for development exit finance is set to continue indefinitely.