Developers need a ‘Plan B’ exit strategy
Developers must consider more than one exit strategy for their schemes in the current market, according to Oblix Capital.
The July Rightmove House Price Index reported that the proportion of sellers already on the market who are reducing their asking prices is the highest at this time of year since 2011, indicating initial over-optimism on price.
In addition, the RICS Residential Market Survey says the average time to sell a property from listing to completion has risen to 19 weeks, from 16 weeks in Spring 2017 – an increase of nearly 19%.
This combination of factors means that, as well as units not being sold at the anticipated price, they may not be sold at the anticipated speed, and this can impact an investor’s ability to repay the development loan when it becomes due. Oblix Capital says that developers need to consider alternatives to selling assets when planning an exit for development finance.
Andy Reid, pictured, Director – Intermediary and Network at Oblix Capital, said:
“We have noticed a trend that, while the prime units on a development are often sold quickly, there may be others that are hard to sell and, if an alternative solution isn’t found, a developer could be subject to default interest on the development loan – which can be very expensive.
“Developers who find themselves in this situation have a number of choices. They could refinance to retain the properties to rent out themselves, aim to sell to investors as a buy to let, or arguably the quicker and easier option is to buy themselves some extra time to sell the remaining units, with a development exit bridge. With uncertainty over Brexit looking set to continue to dampen the property market, developers should consider alternative approaches to exiting their development at the start of a scheme, should they be unable to sell the properties in a timely and cost-effective way once it is completed. So, it is worth thinking about building properties that could be suitable for buy to let or even short-term lets and considering development exit bridging loans as an alternative exit strategy.”