What is Development Exit Finance? – Part 1

A report by Which? last month examined the housing market and what Brexit will mean for house prices. Go here if you want to read the report in full:

https://www.which.co.uk/news/2019/07/what-will-brexit-mean-for-house-prices/

One of the metrics they used as a way of judging the health of the housing market, was to look at transaction volumes – in other words the number of properties being sold in any given month. As you would expect, a lower number of sales can indicate uncertainty in the marketplace which can of course be triggered by a variety of events, and at the moment of course that’s Brexit.

The latest data shows a year-on-year drop up to June 2019 of 16.5% in the number of residential transactions taking place. This represents the lowest number of property sales since April 2016.

Coupled with this is another report, which is the latest UK Residential Market Survey carried out by the RICS – the Royal Institute of Chartered Surveyors. Amongst other things, it stated that the average time taken for a property to sell, from listing to completion, is currently 19 weeks. This is the joint longest time being taken to sell a house since this metric was introduced in 2017. The length of time is even longer in the South East, where the average is up to 21.5 weeks – that’s five months.

So, the number of flats and houses being sold has dropped, and the time being taken for the flats and houses that are being sold to go through is taking longer.

I work with property developer’s day-in, day-out; and as you can imagine this is not great news for them.

A developer completes a project, and the houses or flats are on the market for sale. But they’re not selling, and of course this puts the developer under enormous pressure.
The finance that was raised to carry out the development, is probably at a high rate of interest. The interest costs on the property development finance is being rolled up and so eating into profits. On top of that, the development loan is likely to be coming to the end of the term, be it 12, 15 or 18 months.

As a result, the lender who provided the development finance starts to put the developer under pressure. They’re looking to be repaid, but the finished properties aren’t selling. So, one option would be to drop the price, but if prices are dropped by 10% to 15% it doesn’t leave too much profit.

None of this is great news for a developer. So, what to do? What’s the solution?

One option is development exit finance.

Put simply, development exit finance is used to repay outstanding finance against a development property once the project has been completed.

In summary, development exit finance can offer the following advantages:

• It takes the pressure off, because the existing lender used to carry out the development project is repaid and so they’re not applying pressure for quick sales or price reductions.
• Exit finance is normally for 12 months, so it provides you with the time you need to sell your completed project and achieve the prices you’re looking for.
• The interest rate is normally less than the rate you will have been paying on the development finance itself, thus reducing finance costs.
• You can often release additional cash as part of the exit finance facility, which enables you to move onto your next project whilst your existing one is being sold.
• Time is often of the essence and exit finance can be arranged very quickly.

In next week’s blog, I’ll look at the exit finance options available in more detail, including interest rates, fees and loan term as well as the information you will need to provide to a prospective lender.

In the meantime if you have a requirement for development finance and you want to speak to an expert, gives us a call on 020 8949 2122 or email us at keith.park@fundingtrack.com