"Softening prices can have a significant impact on a borrower’s ability to successfully exit their development loan"
Increasing demand from clients is being met by a growing number of lenders in the sector and competition is rife. But this doesn’t mean that every application is straight forward and in the current environment in particular, with low property transaction numbers and softening prices, there are some common themes that lead to applications being declined.
Here are three of the top reasons for investment case declines and some ideas on how to make those applications a success.
LTV
A common use of bridging lending is to exit development finance for investors to buy them more time to market their properties. However, softening prices can have a significant impact on a borrower’s ability to successfully exit their development loan. Many developments are now coming to an end potentially 15% to 20% down on their anticipated GDV. For example, a lender may have lent £7m on a GDV of £10m and now that the development is completed it’s coming in at £8m and struggling to sell units. In situations like this the numbers just don’t stack up for a straight forward refinance.
But a little creativity can often help to overcome this hurdle. For example, at Yellowstone Finance, we recently worked with an investor who had developed a multi-unit block on a single title. He needed to exit his development loan, but because the GDV had fallen, the deal didn’t fit the criteria of any lenders. So, we took a different approach and managed to structure the transaction from a legal and corporate structure position to allow refinancing possible.
Rental income
PRA regulation of the buy to let market has restricted the freedom lenders have to offer more flexible ICRs that help investors to secure finance on low yielding properties.
But there are opportunities for landlords to invest in low yielding properties without necessarily having to post such a big deposit that it becomes and inefficient use of their capital.
Some short-term lenders are able to structure individual deals that include a mixture of serviced interest and rolled up interest. Any interest that is rolled up is not subject to a stress test and so a solution can be developed that meets the ICR. Similarly, there are lenders that can use deferred interest loans to structure solutions to tackle issues with rental income.
Loan size
With an uncertain political and economic outlook, many lenders are becoming be cautious regarding their concentration risk, particularly on very large loans in high-value areas, such as prime London.
But there are lenders that continue to have an appetite for very large loans and there are other options to tackle cases like this. For example, at Yellow Stone Finance we recently worked on a case where we split a £1.3m bridge into two to deliver a solution for the client.
So, don’t give up hope if you have an investment case declined for your clients. There are often alternative solutions that can make possible the improbable and if you would like help in delivering a creative approach, speak to a specialist to whom you may be able to refer the case.
