By Brian Rubins, Executive Chairman, Alternative Bridging Corporation.
13th March 2020
Residential Development Finance (RDF) is becoming a mainstream product for the wider short-term lending community and for those brokers who already have the knowhow or can take the time to learn the required skills, the rewards can be significant.
While a number of intermediaries do offer advice on RDF as part of their wider activities, there are only a small number of specialist RDF brokers so the space is not crowded.
RDF provides the opportunity to engage in larger loans and to benefit from regular repeat business. A developer’s requirements might range from site purchase loans, possibly before detailed planning consent is granted, through land and construction finance for current projects and exit finance to lessen interest costs during the sales period. Sometimes one lender is suitable for every phase of the scheme, but there are times when different sources of finance will be necessary at each stage of the process.
The business opportunity for brokers come from the reluctance of high street banks to create new relationships and tends to sit in the middle-market, say from five to 50 units or from loans of £500,000 to £10m. Residential developers rarely undertake one project at a time and where advisers provide a true value-added service, the probability is that they will arrange a number of loans each year.
Headline interest rates are a key issue, but far from the sole criteria in choosing a lender as both pricing and deliverability are significant considerations. Pricing is made up of a number of elements: arrangement fees at say 1% of the facility, interest usually at between 6% and 10% per annum and exit fees at 1% – 2% of the loan or of the gross development value (GDV). When analysing various offers, each element and their totality needs comparison.
Deliverability is key to choosing a lender. Identifying a lender that is established and comfortable in RDF is a priority. Will the lender help build the case and does it have a specialist team for RDF? These are indicators of how efficiently, simply and swiftly your client’s requirements will be satisfied.
There are many skills needed to successfully place an RDF case, some of which may need to be learned by brokers. But the benefits justify the efforts and getting involved in RDF can be very good for broker business.
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