A little extra leverage goes a long way

By any measure, it has been white knuckle, rollercoaster stuff. After coming to a virtual standstill during the first national lockdown, the residential property market has roared back to life.

Figures from HMRC show that 191,000 homes were sold across the UK in March. That’s more than double the number that changed hands during the same month in 2020, and up almost a third on this February. Meanwhile the Bank of England confirmed this week that mortgage lenders grew net lending to individuals by £11.8bn in March – the biggest monthly jump on record – as demand from homebuyers surged.

Development lenders too have been through an extraordinary 12 months, but in our sector the changes have been a little less abrupt. As lockdown first took hold, developer demand cooled and many development lenders overhauled their attitude to risk.

Shrinking LTVs

With average LTVs shrinking, the market quickly lost steam and projects in distress became opportunities for acquisition. If you were a developer with strong liquidity or a good funding partner, you could deliver these sites at a discount. If you weren’t, well, that was just too bad. With many lenders unwilling to go above 50% LTV, claims that lending was still going on rang increasingly hollow.

On the front line, brokers often joked that the reality was “pretend, not lend.” The more diplomatic version they told their clients was that it was “business, but not business as usual.” Fast forward to the present, and sentiment among both developers and brokers is on a roll – with the lending taps once again open across the industry. But a stop-start attitude to lending does the sector no favours.

Running with the herd

Rather than running with the herd, Atelier has always preferred to focus on experienced developers with an achievable schedule and a clear exit – in good times and bad.

That’s why, even in the darkest days of last year’s lockdown, we were still writing deals at up to 65% LTV. True, we rejected many more projects than we accepted, and we looked longer and harder under the bonnets of those we selected than other lenders might have done. In the 12 months following our formal launch at the end of January 2020, we funded more than £100m of loans.

But for us lending is always more than a transaction, it’s a partnership. We build deep and strong relationships with our borrowers, because we understand and support what they’re trying to achieve. And we know that for the right borrower, a little extra leverage goes a long way. That’s why we are willing to lend up to 70% LTV on the right deal.

By allowing the developer to stretch their senior debt to this level, we can often spare them the additional cost and hassle of getting mezzanine finance. This in turn makes it easier for them to attract a JV partner if they need to share the equity load. Put simply, I’d rather be at 70% LTV with the right borrower than at 50% with someone less durable.

Race to the bottom

The current strength of developer demand is sparking a ‘race to the bottom’, with some lenders competing on lower-rate, higher leverage combinations. It’s at times like these when risk-adjusted pricing can become an afterthought.

Not at Atelier. When considering a loan, we ask our borrowers questions that are searching and, at times, challenging. We do this because we want to both assess risk and fully understand their project, not just tick boxes. When we lend, we do so from a position of trust and understanding. Because we’ve looked beyond the headline plan and costings, we can decide to lend at higher leverage than mainstream or less well-capitalised lenders can.

For us, the principles of sound, well-researched and properly underwritten lending held true even during the maelstrom of the past year.

And they’re as true now, as the market booms, as they were when the world seemed to be closing down last spring. For us, and the developers we choose to partner with, a little extra leverage always goes a long way.