You do not have to be a genius to understand the reasons why demand for housing will continue rising inexorably over the coming decades.
The factors driving demand are well known, albeit that some are cyclical in nature.
Economic growth, for instance, is creating thousands of new jobs every month, resulting in falling unemployment and buoyant consumer confidence. Add in low interest rates and a surfeit of mortgage availability and it’s easy to see why the number of potential housebuyers chasing new property when it comes to the market reached an eleven-year high this summer.
The principal factor underpinning housing demand is population growth. Immigration has had a huge impact upon the UK’s demographics; according to the respected Cambridge Centre for Housing and Planning Research, the requirement for 250,000 new homes every year will gradually rise as the number of households is expected to increase by 20% between 2011 and 2031.
Supply-side factors affecting the production of new homes are equally well documented.
Skill shortages and planning delays often slow the housebuilding process to a crawl, but perhaps the greatest frustration felt by those who wish to develop properties, be they in the leafy suburbs or on out-of-town brownfield sites, is finance. Or rather the lack of it, particularly the reasonably affordable variety.
The old banking acronym, well-known to those of us of a certain vintage who borrowed funds with which to develop property portfolios before the lending process became worryingly robotic, is Campari. This has nothing to do with the sumptuously red-coloured alcoholic beverage manufactured in Milan, and everything to do with discretion, a word that has, sadly, virtually disappeared from the banking lexicon.
Campari stands for: ‘Character; Ability; Margin; Purpose; Amount; Repayment; Insurance’, headings which old-fashioned bank managers used to apply to borrowers and their financial pitches. Essentially, it’s a straight-forward method of determining the bank’s risk, though by assessing a borrower’s character and ability to repay a loan, it also adds an important element of discretion to the process, rather than relying upon a computer program created by someone whose entrepreneurial spirit extends no further than buying his Pot Noodles when they’re on a three-for two offer.
The categories are self-explanatory: ‘character’ considers honesty and integrity as well as banking and credit history and whether the loan is likely to be repaid on time.
Ability takes account of the borrower’s business record and acumen and considers whether the borrowing proposals are realistic.
Of course, the bank will require a margin (a profit) on its loan, while ‘purpose’ is hugely important: if the finance is required to address business problems, or the returns anticipated by the borrower appear overly-optimistic, a loan is less likely to be extended.
Assuming the amount required is realistic, the borrower must have the means to repay it, while insurance, in the form of security, provides the lender with a degree of comfort in the event of things going pear-shaped.
While mainstream banks have gradually withdrawn from lending to small businesses and modestly-sized firms engaged in residential property development, the so-called ‘challenger banks’ have endeavoured to fill the void. Most are, however, enormously expensive. As an example one will lend up to a maximum of 75% of a property’s value but no more than 60% of gross development value; the minimum sum a company or individual may borrow is £500,000 for a maximum period of two years at 1.5% per month.
Some readers may consider this reasonable, but the fees levied on would-be developers are eye-wateringly expensive. Typically, the bank’s website announces, arrangement fees are 2%, but there is a further exit fee, payable upon completion, which also amounts to 2%. No wonder peer-to-peer lending has become so popular.
There is, however, another way.
Isle of Man-based Sterling Private Finance Ltd, has seen demand for its property finance products rise markedly of late as a result of its discretionary, ‘Campari’-style approach to lending.
Take for instance, a recent example of a property developed in the UK where the developer built two new properties secured on a third , which he retained as an investment.
A first charge was taken on the main property and a loan of 75% of the purchase price plus the development expense was extended to the developer, who borrowed comfortably more than Sterling Private Finance’s minimum .
Though the developer expected the work to be completed within nine months, once the sale process was included, it was agreed that the loan should run for fifteen months – the minimum is twelve – with interest of 1.25% per month ‘rolled-up’, ie payable once the first flats were sold and the loan repaid. The arrangement fee was 1.5% – there were no ‘exit’ fees – while the borrower was responsible for all legal expenses associated with the deal.
A spokesman for Sterling Private Finance said: “As Britain’s housing market remains remarkably buoyant, our private finance property development loans are proving enormously popular, primarily because we consider all proposals presented to us and cost-wise, they’re extremely competitive”. How refreshing. Mine’s a Campari and soda – plenty of ice please.