By Ian Humphreys, co-founder and head of lending, Brickflow
When Chancellor Rishi Sunak made his first Mansion House speech in July 2021, he called for financial services provision across the UK to be ‘more open, more competitive, more technologically advanced and more sustainable’.
Many companies within the financial services sector believe they are making great progress in supporting Open Finance, creating open ecosystems and sharing data on digital platforms, but this doesn’t appear to be the case for commercial lenders, particularly providers of development finance, where it is still difficult for property developers to access funds.
Developers have not had the luxury of being able to shop around and compare lenders’ offers in the same way they would other financial services products, such as residential mortgages, bank accounts, credit cards or insurance, yet these are the people who need a digital solution most.
They’re unlikely to have the time, energy, knowledge or inclination to assess and compare the numerous commercial lending options currently available, so what options do borrowers have?
They can:
- Input ‘development finance’ into a search engine and be overwhelmed by the results – banks, mortgage advisers, brokers and specialist firms all offering ‘solutions’ in isolation.
- Contact an introducer, specialist firm, other professional services provider, such as an accountant or estate agent, or maybe a friend. Introducers, such as mortgage brokers or advisers, must be briefed on everything, including property details, planning situation, land/build costs, estimated selling price and borrowing amount. Having shared this information with one lender, introducers will spend time repeating the process in order to obtain comparable quotes.
- Contact lenders used before. If they’ve raised money for other projects, developers may return to the same source (blissfully unaware a better deal can be secured elsewhere).
Fragmented market
Being able to source and easily access commercial funding is fundamental to kick-starting a building project and helping the Government meet its target to build 300,000 new homes per year. Yet the process remains difficult.
Chasing development finance, arranging meetings, showcasing experience and repeatedly answering questions about the project – ie the property, planning situation, land/build costs, selling price, profit margins, overall valuation, borrowing requirements and where the deposit is coming from – takes months.
Overlay this with different lending criteria, most lenders work off the gross development value and will lend a percentage of that (it varies between 55% and 75%), changing geographical limitations, building specifications and experience requirements, and it’s easy to see why developers are overwhelmed and unable to compare these variables.
Third-parties such as brokers or introducers face similar challenges; they need to regularly update their databases to keep track of the ever-changing lending criteria of 50+ development finance providers, pricing/policy variations and new products coming onto the market.
The process is equally cumbersome for lenders; their differing lending criteria around loan size, deposit requirement, geography, asset type and borrower profile means they are inundated with inappropriate enquiries, resulting in low loan conversion rates of around 5%.
With such a fragmented market and so many variables, it’s no surprise to find the Federation of Master Builders, in its 2021 Housebuilders’ Survey, found one in three housebuilders cite ‘a lack of finance’ as one of their biggest barriers to progressing projects.
As is familiar with many challenges, the answer lies in technology. In October 2020, Brickflow – the UK’s first comparison site for development finance – launched.
Its online tools and development finance experts:
- Enable borrowers to showcase their experience/projects and check the viability of sites online before going to see them.
- Apply for funds.
- Compare estimates from compatible lenders (ranked by loan size and price, helping borrowers improve their Return on Capital Employed).
- Return completed project appraisals to up to five lenders to bid on.
- Select the best loan terms and continue with the final application process which culminates in credit being approved.
The digital platform delivers estimates from more than 35 lenders’ in two minutes (this would take several weeks if completed manually), and typically finalises the whole credit approval/final loan offer process in six weeks (as opposed to the usual six months).
Having searched and stored 121 pieces of data from each of its 37 lenders (representing 70+% of the market) and by using proprietary algorithms, the platform instantly selects lenders likely to make a loan offer, resulting in a 95+% conversion rate from Heads of Terms to completion.
And with borrowers able to compare estimates from compatible lenders, ranked by loan size and price, it improves their Return on Capital Employed, often saving them hundreds of thousands of pounds, which can be ploughed back into more property development projects.
The benefits to the wider industry are clear; a more efficient funding process saves time, money and resources, enabling all stakeholders to do their job better. And the more efficient the borrower and lender, the greater the gains for the UK housing market.
