I think it’s fair to say at the turn of the year no one expected that we’d be stuck in our homes for several months and the immediate future of our economy would be looking far from rosy. In fact, going into January and early February, Brexit was still the buzz word on everyone’s lips in the industry. I think the way we responded as an industry was admirable. Had something of this nature happened say seven or eight years ago I don’t think we would have been as well placed to take it on the chin. I believe we’ve matured as an industry in recent years and as a result we are more robust in our lending practices and our ways doing things.
As I’ve often complained about before, for me one of the key things the development finance sector needs to deliver is constancy. Without consistency we don’t have housebuilding and new homes being created. Initially it was disappointing to see that some self-styled development finance lenders were unable to decide whether they’re in or out. This is not bridging and the risks are much higher. I strongly believe that if you can’t be in the market offering development finance during the bad times then don’t operate in the market when it’s performing well.
The biggest losers from this level of unpredictability is the consumer and, after all, the main goal of the development finance sector is to assist SME builders and developers create new homes. Similarly, I found there to be a high level of frustration amongst brokers unable to place deals with lenders who had suddenly dropped out the market. The deal flow was still there, but some of the lenders were not. However, the majority of us stood firm, with tweaks made to LTVs and some lending criteria understandably tightened. It was great to be able to report that Magnet Capital had one of our strongest months for new business in May, and we weren’t the only ones setting PBs during the lockdown period.
One of the criticisms I’ve had of the development finance space over recent years is that we’ve lacked innovation. The most successful lenders over the coming years will be the ones that can innovate and provide new and exciting ways of doing things. Development finance lenders have been on a slow curve to absorb and start using new technologies, so it was interesting to watch the Covid-19 crisis accelerate this movement. Lenders suddenly had to be equipped to have their whole force work from home.
At Magnet Capital it was no different for us. We make a strong point of meeting every single person we lend to face to face and for the first time in my career this was no longer possible to do with every borrower. Whilst Zoom was an excellent tool for staying in touch with each other, I don’t believe that there is a replacement for face to face meetings and contact. I’m delighted to report that our site visits and face to face meetings have started again where appropriate.
Looking forward I think development finance lenders need to avoid the mistakes of the past. There is no point of coming to market at LTVs you can’t sustain. We are almost undoubtedly staring down the barrel of an unprecedented drop in property prices. Development finance lenders with genuine expertise would have already factored this into their offering long before we reached this crisis. However, I will add that it’s not LTVs that cause the biggest threat to development finance lenders, but internal practices and attitudes to lending. I have seen via some of our introducer partners examples of the corner cutting that still exists in the development finance industry. These are the lenders that are going to be tested the most.
Brexit is also still a looming cause of uncertainty in the medium-term outlook. I’ve already seen many cases of building suppliers from the continent looking to raise prices for our builders over the coming year and this could seriously hamper many new build and heavy construction projects. Again, a development finance lender that understands the market will have already factored this into their offering.
Unfortunately I don’t have all the answer, but going forward we need to continue sensible lending practices at sustainable LTVS. We will need to continue to adapt. This is how we’re going to provide consistency to our brokers and consumers, and this is how we’re going to continue to thrive as an industry.
Development finance grade 7/10
