sapphire
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Post by sapphire on Feb 16, 2018 12:04:54 GMT
Would I be right in thinking that *generally speaking* a first charge loan on a developed property (i.e. no further input needed to the current state if the property has to sold in case of a default) carries a lower risk than a first charge loan on a property development project (where a property is being rebuilt or refurbished, on completion of which the property would be sold or refinanced to repay the loan)? (Assume similar LTVs for both).
Presumably the development loan carries an extra risk of the required development/refurbishment work not completing or faults/quality issues with completion or getting delayed for various reasons and so increasing the risk of a default and a loss of interest/capital?
I realise there can be exceptions, where in particular instances, due to the circumstances, the secured loan on a developed property may carry a much greater risk than that a 'typical' development loan and also cases where a secured loan on a particular development loan may carry a lower risk than a 'typical' secured loan on a developed property.
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Post by jevans4949 on Feb 16, 2018 14:06:12 GMT
Risk with a development property is that if the developer runs into trouble - on the project you invested in or something else, or his health - and maybe not his fault - then you may be left with an expensive hole in the ground. In that case a results-based staged drawdown is to be preferred. In any case, you may be left with the loan hanging over for a few months for completion of work, or sale of completed premises, etc, so may not get your money back right away at the end of the agreed term. (OTOH you may get it back earlier.)
With a ready-built property, it's still a question of whether the borrower can achieve what he expects - installation of a successful business, renting units, onward sale of units, etc. It's probably easier to assess the value of residential units than commercial. There's also the danger that the borrower discovers major faults in the property that nobody knew about, and it then becomes a "money pit".
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Liz
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Post by Liz on Feb 17, 2018 15:10:19 GMT
I would say the complete development is less likely to default and if both did default the complete development would recover far more than a half built site. See DFL 1 on Lendy for an example.
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Post by justuslee on Feb 28, 2018 10:38:28 GMT
This is a very relevant thread.
We have been offered a number of distressed developments to consider recently, and unfortunately for the lenders investors, these assets are worth considerably less in their present state than the monies owing.
The major challenge is that no building contractor, is happy to pick up a half-done job as you can imagine. Who takes responsibility for the first half of a development if it wasn't completed correctly? For new build developments this is even more of challenge where you need the 10Y NHBC house builders guarantee.
Many challenges ahead for a number over ambitious and poorly presented developments.
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sapphire
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Post by sapphire on Feb 28, 2018 10:58:48 GMT
justuslee Indeed, an incomplete project is a major risk and so unlike a 'developed asset' which can be sold without further expense for completion, an incomplete development can turn out to be a liability. Having reflected, a few more reasons why development loans *may* be riskier than those on a developed property: The current valuation for lending on development projects is typically based on the GDV (Gross Development Value) less the estimated future development costs. GDV involves an assumption of what the price at a future point in time is going to be (once the development is completed) ...so I think reduces the level of confidence in the current valuation than the valuation of a developed property which is based on current prices, without such additional assumptions. Also, the estimate of future development costs introduces an extra element of assumptions and uncertainty so again reduces the degree of confidence in the current valuation of such a project. I would welcome any views if any gaps in my understanding.
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Post by vaelin on Feb 28, 2018 17:53:35 GMT
I'm starting to divest from loans that rely on gross development value for security. Even when there are tranche drawdowns, there is a gap between the moment the loan amount exceeds the site value to the moment it is a completed development where a portion of the loan isn't secured by any realisable asset. Sometimes that gap can represent a fairly significant sum of money, and the security is then contingent entirely on the ability of the developers to complete and sell at a value set before the development even existed. The strange thing is that these loans don't appear to have any premium on their interest rate, so there is no real incentive to invest in them.
I'd rather invest in loans where I can recover my funds even in the event of a catastrophic failure for the related business; where the value of the security is independent of the business activities of the borrower.
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Post by justuslee on Mar 19, 2018 14:31:37 GMT
Hi Vaelin, platforms that illustrate the open market value (OMV) should provide you with the transparent equity cushion your desire. For instance, we have a substantial property that's nearing completion and at very low (OMV) loan to value of 43% - if you read the valuation report, it's only when a property development is complete that the (GDV) is to be of substance. www.justus.co/marketplace/available-loans/ |
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happy
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Post by happy on Mar 21, 2018 9:46:37 GMT
I certainly am of the view that not all development projects are equal in terms of risk and I invest in them accordingly. I weight my investment in development loans based on 3 broad types: 1. land, 2. new-built or demolish and rebuild development and 3. renovation based developments and I believe that generally risk decreases 1->3. I therefore I tend to lend less to type 1 and more to type 2 and 3 developments however the higher the LTV the lower the amount I will lend.
More recently I have stopped most investments in development lending in the south east (especially London) and don't invest in many projects above 60% LTV. Another few rules I have are I only lend where planning permission is in place, no speculative LTVs and I also avoid any loans that are not staged draw-down and do not have a managing surveyor assigned.
Additional consideration is given to type of development; typically I lend more to a residential development than a commercial development and if it is a development being funded for a supporting business where servicing of any subsequent refinance lending in dependant on the existence/profitability of that business then this is factored in ( i.e. a restaurant could be considered higher risk than say a doctors practice or a food manufacturer)
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Post by Deleted on Mar 21, 2018 10:05:30 GMT
You can't sell what a customer does not want to buy.
So while a piece of land with planning permission is an attractive option, a half built development with no guarantees to quality is a white elephant and so while many valuers see "spend" as adding value, there is a fair arguement that spend that occurs before "sales" is just one great big gamble.
In ordinary accounting you could factor in a risk to that spend but of course neither valuers or publically listed companies like to do these things. My own view is that a piece of steel taken off the shelf becomes scrap value the moment you start machining it. Most accountants would add the raw material and then add the labour and even the overhead to the metal. This over values WIP.
In the same way property developments overvalue their work in progress.
The exciting news is that companies can flip this and sell the development off plan, so assisting the cash flow of the company (for a discount) while developers can use accelerated building techniques. Seldom seen in the UK, they are often used in more civilised parts of the world.
General note, UK builders are between 50 and 100% more expensive than continental builders. No real competition.
If you throw these variables into the mix you will find that some of the multiple development loans are in crisis and have been since day one as the valuation model being used is not sufficiently conservative.
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Post by justuslee on Mar 21, 2018 12:20:03 GMT
This is a really interesting thread and is very much part of the educational focus that's really needed for the sector to realise it's full potential.
For instance, I have received a project from a reputable property developer this morning that looks good on the face of it.
3.15 acres in leafy Cheshire, planning permission for 10 Detached Houses, 3 of which form part of the affordable housing scheme.
Even if the developer purchases the land for cash with permission, which they are in a position to do;
Purchase Price including costs £2M
Build Costs £2.5M
Interest and Costs over 18 Mths @ 10% gross £400K
Total development costs. £4.9M
7 X 2500 Sq FT Detached Houses £700K = £4.9M
3 x £200 Social housing = £600K
= £5.5M Gross Sales Value
£600K profit if it all goes well - Why would you fund it?
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happy
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Post by happy on Mar 21, 2018 13:45:50 GMT
This is a really interesting thread and is very much part of the educational focus that's really needed for the sector to realise it's full potential. For instance, I have received a project from a reputable property developer this morning that looks good on the face of it. 3.15 acres in leafy Cheshire, planning permission for 10 Detached Houses, 3 of which form part of the affordable housing scheme. Even if the developer purchases the land for cash with permission, which they are in a position to do; Purchase Price including costs £2M Build Costs £2.5M Interest and Costs over 18 Mths @ 10% gross £400K Total development costs. £4.9M 7 X 2500 Sq FT Detached Houses £700K = £4.9M 3 x £200 Social housing = £600K = £5.5M Gross Sales Value£600K profit if it all goes well - Why would you fund it? Wouldn't pass my smell test that's for sure. Would be interesting to know what rate the developer was expecting to pay 
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Imothep
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Post by Imothep on Mar 31, 2018 19:37:05 GMT
You can't sell what a customer does not want to buy. So while a piece of land with planning permission is an attractive option, a half built development with no guarantees to quality is a white elephant and so while many valuers see "spend" as adding value, there is a fair arguement that spend that occurs before "sales" is just one great big gamble. In ordinary accounting you could factor in a risk to that spend but of course neither valuers or publically listed companies like to do these things. My own view is that a piece of steel taken off the shelf becomes scrap value the moment you start machining it. Most accountants would add the raw material and then add the labour and even the overhead to the metal. This over values WIP. In the same way property developments overvalue their work in progress. The exciting news is that companies can flip this and sell the development off plan, so assisting the cash flow of the company (for a discount) while developers can use accelerated building techniques. Seldom seen in the UK, they are often used in more civilised parts of the world. General note, UK builders are between 50 and 100% more expensive than continental builders. No real competition. If you throw these variables into the mix you will find that some of the multiple development loans are in crisis and have been since day one as the valuation model being used is not sufficiently conservative. This is a really interesting thread and is very much part of the educational focus that's really needed for the sector to realise it's full potential. For instance, I have received a project from a reputable property developer this morning that looks good on the face of it. 3.15 acres in leafy Cheshire, planning permission for 10 Detached Houses, 3 of which form part of the affordable housing scheme. Even if the developer purchases the land for cash with permission, which they are in a position to do; Purchase Price including costs £2M Build Costs £2.5M Interest and Costs over 18 Mths @ 10% gross £400K Total development costs. £4.9M 7 X 2500 Sq FT Detached Houses £700K = £4.9M 3 x £200 Social housing = £600K = £5.5M Gross Sales Value£600K profit if it all goes well - Why would you fund it?
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Imothep
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Post by Imothep on Mar 31, 2018 19:41:06 GMT
I’m new to the forum to apologies I can’t work out how to reply to a post and quote , build costs are higher in the U.K. than continental Europe that is true , however , we have rigorous building regulations to meet and of course labour costs more here . I would respectfully suggest as well that the quality you will receive from a respected U.K. builder is far superior to what you would get in Europe ....
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Post by Deleted on Apr 1, 2018 11:11:36 GMT
I’m new to the forum to apologies I can’t work out how to reply to a post and quote , build costs are higher in the U.K. than continental Europe that is true , however , we have rigorous building regulations to meet and of course labour costs more here . I would respectfully suggest as well that the quality you will receive from a respected U.K. builder is far superior to what you would get in Europe .... Building regulations in the UK are of course laughable compared to say German, Danish, Dutch, Swiss regulations, both in terms of the quality of research into the regulation theory, the application of those regulations and the confidence in those regulations. Labour, in terms of skilled labour in Germany, Denmark, the Netherlands and Switzerland is far more expensive than in the UK and the actual skills are often higher. However, unlike in the UK, far more work is automated, more off site building is done. That is not to say that some European countries are not worse and not cheaper, certainly I would not like to buy an Italian property, a Greek property etc where regulations, as you say, are poor, unenforced and the skilled worker is often not used. Where I was commenting I was not considering southern Europe, however for Northern Europe it holds true. mia culpa
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Imothep
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Post by Imothep on Apr 1, 2018 14:57:58 GMT
Agreed on north europe ( most not all ) , however on day rates, bricklayers in London now £220/250 day ( & that’s a bricklayers day - knock off by 3.30 , spot board cleaned, mixer washed off, in van & offski by 3.45 ) , knowing many tradesmen across europe including bricklayers, none of them make £250 day ...
I have some groundworkers on for me for the next two weeks, gang of 2, I supply digs, materials, PPE , parking , plant ( and probably breakfast in the cafe everyday ) , £250 a man , I could go on and on, but good quality trades/ labour is very expensive in UK.
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