Getting small builds off the ground

It’s official government policy to build more houses. Communities secretary Greg Clarke announced that policymakers were “pulling out all the stops to get the country building”. The goal to build more houses has near universal support. Yet completions remain well below target.

One reason is finance. Housebuilders, particularly smaller companies in the industry, struggle to get funding. Banks are slow to back viable projects. Even when banks authorise a deal they will only offer partial support. Bank loans typically cover 60 per cent of the construction cost, leaving the housebuilder to find the remaining 40 per cent from other sources. For smaller builders this is too much, leaving many viable construction projects unbuilt.

Jubilee Mill, a BLG development

Jubilee Mill, a BLG development

A solution lies in specialist finance houses. These offer loans to housebuilders on superior terms to banks. They also offer a range of other services to help housebuilders get their project off the ground.

One of the best known specialists in the UK residential sector is BLG, which has been lending to developers since 2003. Managing director Stuart Parfitt says there are good reasons housebuilders use specialists such as BLG. “We can offer more than 80 per cent of deal costs,” he says. “And we’ll help with the remainder too by putting the borrower in touch with other sources of finance.”

The reason specialists can fund a greater proportion is their expertise in de-risking deals. Specialists work on only one type of deal. This means loans officers will have deep experience, so can identify which residential deals are sound and which need further work.

Some of our clients work from a van, not an office, and have just four or five labourers

Mr Parfitt explains: “Our managers have been working in residential property for an awfully long time. We have a guy who has been making loans to housebuilders since 1985. I moved from general finance into this sector in 1990. I have a client I deal with on a weekly basis who I first dealt with all the way back then. Put together, our team has more than 200 years’ experience.” In contrast, banks use generalists for lower-scale deals, leading them to be risk averse.

Specialists also bring a vested interest in making sure their clients prosper. “Our senior management are all owners and stakeholders,” says Mr Parfitt. “We do eight to ten deals a month and we want to make sure the deals are successful.”

To provide help a company such as BLG will work hard to understand every aspect of the project. It brings experts to advise on every stage. “We have two valuation surveyors in-house to look at the property risk. Cécile Verroest, our credit and risk specialist, helped create HSBC’s credit training programme. Our legal specialists go through the planning application,” says Mr Parfitt. “If there is any issue we can advise the borrower on the best way to proceed. Banks rarely offer these services.”

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Stuart Parfitt, Managing Director BLG

Scale matters. Banks prefer to concentrate on big deals. Specialist lenders prefer to concentrate on the neglected smaller tier. “Our typical deal is £2 million to £3 million,” he says. “Some of our clients work from a van, not an office, and have just four or five labourers. They don’t get the attention they need from banks, so they come to us, where they can build a long-term relationship and get advice from experts.”

Geography matters too. Banks often apply uniform criteria nationwide. This approach fails to match the reality of housebuilding. “We have relationship managers around the UK,” says Mr Parfitt. “They know that in Surrey planning permission is the biggest challenge, whereas in Morpeth it is funding, not NIMBYs. Housebuilders need a lender who appreciates the situation on the ground.”

The net result is that specialists are able to offer greater support to residential builders than high street banks across equity, mezzanine, stretch-senior and joint-venture finance. Specialists can even intervene when existing deals hit the rocks.

BLG stepped in to help a four-apartment development on the south coast. The developer was pioneering a new closed-panel timber-frame system. To fund the project, the developer’s broker had arranged finance of £3 million, comprised of a senior loan topped-up by a mezzanine loan. Frustratingly for the developer, the senior lender was dragging its heels and putting the project at risk, so his broker called BLG for help. BLG arranged senior funding in two weeks and mezzanine within two days. The developer was able to continue with the build.

“Specialists offer clear advantages over banks,” says Mr Parfitt. “The only problem is that many housebuilders don’t know about us. We would love to talk to smaller housebuilders to show them what we can offer.”

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