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When Will The Banks Lend to Developers Again?

As we all know the credit crunch stated in 2008 and is now entering a new phase. Prior to this High Street Banks would lend up to 100% for developers to purchase and build out their development projects. Even projects of dubious quality and thin margins relying on the rising property bubble to raise their profits during the construction period were 100% funded. Now we are in a totally different world with the High Street Banks not lending to any new developments and even stopping funding part built developments. When will this change? The answer is not in the foreseeable future.

What changed the banks minds? One thing was the amount of projects they had on their books that were in negative equity, why waste more money on schemes that will make a loss. These loans normally would have been foreclosed but if that happens then the loss has to be included in the accounts, whereas if they are left as they are they can be classed as an asset on the balance sheet. All of the banks have equity shares in house building companies, in fact according to the Sunday Times of 8th January 2012 Lloyds, with their acquisition of HBOS are now the fourth biggest house builder in the country only behind Barratt Homes, Persimmon and Taylor Wimpy.

This on top of the new banking regulation that requires banks to hold more capital and the current view that we are entering Credit Crunch Part 2 have dried up the loans banks are willing to lend. Fortunately there are some alternatives to the High Street Banks; niche private banks are still lending and so are Bridging Loan lenders. The rates that these lenders charge are a lot higher than that that was previously available from their banks but for the right project a decent return can still be generated for the developer. The developer has now to have “some skin in the game”, that is some of their own money invested in the scheme. However 100% build costs are still achievable with a contribution towards the cost of the purchase of the site. In some cases a joint venture could also be set up where the lender funds the whole development costs including land purchase and build costs the resulting profits are then shared 50-50 between the lender and the developer. Although for joint ventures the development has to be in a prime location in the Southeast.

Unfortunately with regards to the High Street Banks that old adage applies that they will only give you an umbrella when the sun is shining.



This post first appeared on Bridging Loans, Property, And Finance News And Articles, please read the originial post: here

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When Will The Banks Lend to Developers Again?

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