Written by Tom Stephenson, Asset Finance Adviser
Originally published in Business Moneyfacts magazine
With so much uncertainty in our industry, one of the most important areas in a lender’s underwriting process is to understand the exit strategy. From a developer’s point of view the obvious exit strategy is usually via sales, but longer build times, varying demand of asset class and supply chain issues have caused fluctuations within the housing market. Knowing your options and having flexibility is vital for successful investment and having a plan for the worst-case scenario is more important than ever.
What are the main options?
Exit bridge (refinance)
One of the most common exit strategies is to re finance on to an exit bridge. This is a popular route as it tends to be quick and flexible regarding asset disposal and timescales.
The market is offering some unique products which allow for cashflow modelling of a loan based on expected sales, allowing for maximum LTV and low pricing. This will allow for an equity release on a case-by-case basis depending on overall loan to value on the remaining loan facility.
Buy-to-let
The second option developers might consider is to hold onto the remaining units and place them on a Buy to Let mortgage. This is a long-term loan that is usually cheaper than an exit bridge. A long-term strategy may not suit some developers as equity is retained within the development, however there are options with no early repayment charges which could allow the developer the flexibility to sell if needed.
One of the problems that developers can experience, is that the loan to value is calculated on interest coverage ratios. If the yield isn’t high enough, it can be challenging to get enough leverage to repay the existing debt. However, there are products that exist that allow you to use the yield and assessment of the borrower’s income by the way of top slicing which could help the borrow increase the loan to value.
Blended buy to let and exit bridge
A strategy which is becoming increasingly common is for developers to split the remaining units, putting half on buy to let mortgages and half on an exit bridge. There are lenders in the market that will consider both structures. This allows the developer to retain a long-term investment while also giving them the flexibility to free up some capital for other opportunities.
The liquidity within current development finance market means there are more options available, but the right option will always depend on the client and the strategy they have for growing their business. Historically, developers have suffered from a shortage of equity and not having the option of retaining units for long term income. As the market is developing, both options are becoming increasingly viable.