A guide to refurbishment finance
By Henry Manley-Cooper -
Throughout multiple UK lockdowns, the housing market has been largely protected compared to other sectors.
In the past year continuity of house sales and development activity has been underpinned by government support packages, some of which stemmed from Boris’ build, build, build mantra back in June 2020.
The latest budget updates were no different, buyers have further benefitted from extensions to the stamp duty holiday deadline and the introduction of mortgages at 95% LTV have created new opportunities.
Reforms last year were described as some of the most radical to our planning system since world war two.
Greater flexibility was granted to developers to build with reduced permissions; policies included being able to extend existing purpose built blocks of flats upwards to create new self-contained homes; a new permanent PDR to allow existing houses to be extended to provide more living space by the construction of additional storeys and; a permanent PDR to allow the construction of additional storeys on free standing blocks and on buildings in a terrace of houses or of mixed use (with an element of housing), to create additional accommodation.
This is really where the opportunity sits for developers right now.
Having seen the success in the early years, it is unsurprising that all of the ‘low hanging fruit’ and the best opportunities under the initial PDR programme have been snapped up.
This means that the combination of recent reforms stimulating the buyer side and government adaption of successful development programmes last year creates a huge opportunity for developers particularly, when it comes to refurbishments.
With the pool of buyers expanding and the number of available conversion opportunities increasing, it seems like we could see the perfect storm of good quality housing, in ideal locations being bought to market in an affordable way.
The refurbishment market has huge potential and with the unlocking of further sites, we could see a notable shift in developers moving away from ground up and instead, refurbing properties with secure exits underpinned by government support.
Whilst we may see greater availability of refurbishment opportunities, projects like this can in some case be more challenging compared with ground up schemes.
Whilst there is an existing structure in place, the developer can inherit underlying issues which could later be problematic.
That means, that there are a number of points to address before taking on a scheme. Below are some areas it is worth considering in detail.
Identify the type of refurbishment
Refurbishment is a broad term covering everything from light works which can be minimal renovation (painting, decorating, new fixtures and fittings etc) or more significant works including a change in asset class along with extensions to floor space and storeys.
Refurbishments can be split into three simple categories, light, medium or heavy works. It can vary from lender to lender as to what falls into these brackets but funders like Avamore Capital provide clear parameters.
Light, medium and heavy refurbishments are defined by the percentage of works compared to the day 1 market value. The bands are 25%, 50% and 50+% respectively.
For a heavy project, there is no upper limit to the level of works required and the build cost can exceed 100% of the market value.
The clear distinction between the types of refurbishment means that pricing and deal structure is reflective of the amount of works required and so it’s important to have all of the figures in place at initial enquiry.
Think about the wider picture
To submit a refurbishment case, in the early stages, the same information will need to be provided as with any development case.
It is important to be very clear however what the existing use of the property is (particularly if it is a different asset class) and whether planning permission has been granted for the works; this may impact the lender’s ability to proceed.
In addition, in the early stages, the developer should consider the feasibility and logistics of the project.
If it is an office to residential conversion, the lender will need to think about the practicality behind actually getting the build done (for example, if it is in the middle of a busy street how will construction lorries park up and deliver materials?) as well as constraints which might impact the liquidity of the end units (if there is no off-street parking available, will that be a problem?).
Have all relevant information prepared
As the project progresses, it is important to ensure all service providers are given the correct information relating to the existing property and the end units.
Note the level of detail required can vary depending on the works required (particularly in the case of a light refurbishment) but, for heavy or more complicated refurbishments, the main points to present can be broken down as follows:
- Title plan & copy title documents
- Copies of any leases or tenancy agreements and whether there are any rent arrears
- Detail of current rent paid by any tenants
- Copies of notices to vacate provided to occupants of the property
- Details of relevant planning approval (and listed building consent if applicable)
- Build cost appraisal as well as provision of the draft build contract
- Floor plans – current and proposed
- Any surveys carried out in respect of the property or investigations
- Gas/Boiler/Electrical certificates and any service charge agreements
Monitoring Surveyor (Note, for a light refurbishment, you do not need the input of an MS)
- Planning applications / approvals (including a schedule of discharged planning conditions)
- Section 106, 278 and 104 agreements and CIL liability information
- Statutory requirements
- Confirmation of expiration date (more recently, there are an increasing number of instances where developers have held onto sites and the timeframe for construction has significantly reduced)
- Approved site plan and architectural arrangement drawings
- External layout plans, car parking, cycle storage, refuse areas and landscaping proposal
- Schedule of gross internal floor areas/accommodation
- Construction programme, appraisal/cashflow
- Build regulations – confirmation of registration with either the Local Authority Building control or an approved inspector
- As with all developments, up to date searches are key to ensuring there are no delays, most notably the local authority search is key but can take several weeks to receive
- With refurbs in particular, it is important to identify whether there are any overage agreements or title issues which could impact the progression of the deal
The above list is not exhaustive but indicates information and documentation required for each service provider to ensure that the property due to be refurbed has the appropriate permissions to do so.
Henry is Head of Credit Analysis at Avamore Capital. He joined in 2018 as the team’s first Transaction Analyst after completing a MSc in Real Estate Finance and has been integral to the growth of Avamore. He is now responsible for leading a team of 4 Analysts and is committed to ensuring that Avamore offers a seamless and consistent customer experience at the start of every transaction.