Bridging Watch: Repeat after me – contingency

An increasingly unpredictable world is forcing borrowers to seek guaranteed exit deals for their refurbishment projects.

I write this as Rishi Sunak has just stepped away from the despatch box having delivered a Budget speech that rather underwhelmed the property industry.

Sunak’s speech mentioned ‘levelling up’ no less than eight times. The direction of travel for regional infrastructure investment, job subsidy and indeed the mountains of PR around the policy are all bound to encourage many property investors and landlords to venture northwards as property values blossom there and yields maintain their superiority over the South.

Who knows, perhaps where property returns are concerned, we’ll see the infamous North-South divide permanently reverse?

But while geography might be the new consideration for real estate investors, we must also consider some challenges that are newly irritating the sector and that need structural funding innovation. Let me explain.

‘Property entrepreneurs will no longer leave their exits to chance’

Back in the normality of early 2020, how many purchasers of refurbishment projects factored in that we would now be seeing a shortage of labour and materials so acute as to increase their costs to such a margin-busting degree?

This collision of issues affects not just financial return, but also bridging funding methodology, given that too many standard bridging facilities do not allow for unexpected time needed to complete projects nor the cost of refurbishments rising suddenly. The resulting pressure on borrowers is therefore significant.

Property industry’s buzzword?

As ‘levelling up’ is the phrase regurgitated by government ministers every few minutes, ‘contingency’ is now the word that the property sector should be repeating to itself over and over again.

‘The UK’s more agile bridging, developer and refurbishment lenders have an ethos in place that understands these more recent investor challenges’

So given the events that have led to this uncomfortable position, whether blamed on Covid or Brexit or both, borrowers are now seeing the merits of guaranteed exit deals for their refurbishment projects. Doubtless now, property entrepreneurs will no longer leave their exits to chance, preferring the security of knowing that they are able to refinance onto a much cheaper five-year deal once the build has completed and the property is tenanted. How can it not make sense to do this?

New considerations

Investors and landlords today are asking for funding arrangements that need to take account of these previously disregarded factors — whereby the cost of institutional money is rising, construction and refurbishment costs are potentially higher, and projects will take longer.

Fortunately, the UK’s more agile bridging, developer and refurbishment lenders are adapting to this new dynamic and have a lending ethos in place that understands these more recent investor challenges. Actually, Octane Capital has led on guaranteed exit deals as a product proposition for a while and you might say that we are somewhat ahead of the curve.

‘Perhaps where property returns are concerned, we’ll see the infamous North-South divide permanently reverse’

In any case, one size no longer fits all, if it ever did. Consideration is no longer also just of rate, but the lender’s ability to deliver on time and in providing the right term of loan. It’s no use having shaved 10 basis points off your loan if it then has to be repaid three months earlier than your project timeline suddenly dictates.

Brokers will be expected to be able to mitigate what I suppose you might call this perfect storm of circumstances in working with funding providers that are on top of real-world circumstances, a situation that will likely not change much for a while yet.

Being contingent is more important than ever. Especially when the possible alternative is the client otherwise breaching ill-fitting terms to the likely detriment of future funding facilities.