Roxana Mohammadian-Molina is chief strategy officer of Blend Network
Over the past decade, a new generation of specialist development finance lenders have emerged that have sped up and simplified the borrowing process for property developers and investors.
But gearing – often overlooked – is specialist lenders’ strength. It is one of the reasons why specialist development finance lenders have gained a competitive edge over traditional banks and non-specialist lenders.
Gearing is the term used in the financial lending industry to describe the debt-to-equity ratio in a specific deal. In the case of property lending, gearing is normally calculated as the proportion of debt versus equity over the asset’s total value.
It is used by most lenders to effectively decide whether a particular deal is worth lending on, and to be able to appropriately price the risk associated with that deal.
If the level of debt versus the equity in the deal is high, it is considered ‘highly geared’ and if the debt versus the equity is low, then it is considered ‘low gearing’.
The specific level of gearing offered by lenders at any moment in time will depend on many considerations, and will also change over time, depending on factors such as the economic outlook, the market activity and the lender’s appetite towards risk.
Generally, a development finance lender would want to ensure that – in case the value of the property declines – the borrower is not over-leveraged and can afford to service the debt.
While cash is king, many developers will agree that gearing is your friend. Indeed, from a developer’s point of view, using leverage to expand a property portfolio is an extremely useful tool when used correctly.
This means that, for example, instead of investing £1m into a single deal, the developer could spread the equity across several deals by using debt.
This also lessens the property developer’s risk, by lowering their exposure to one single deal and spreading it across several.
On the other hand, lenders will calculate the suitable level of gearing that mitigates their risk should the market turn and the value of properties decline. This is a delicate exercise undertaken in order to offer a good deal to the borrower and minimum risk to the lender.
Kicking into high gear
Higher levels of gearing are also one of the key reasons specialist development finance lenders have been able to gain a competitive edge.
Due to their flexible structure and better understanding of the development finance market, the new generation of tech-powered regulated lenders are able and willing to lend on loans that non-specialist lenders would not dream of taking on, let alone offering high levels of gearing.
As a specialist development finance lender, at Blend Network we have funded many fantastic property projects where the borrower was unable to get funding from traditional lenders, but we offered over 70% gearing post-COVID, when most other lenders were lending at 60% to 65%.
For example, we recently funded a £2.6m facility which blended senior and mezzanine debt and geared it to close to 75% as a loan-to-gross-development-value (LTGDV).
Pre-COVID, specialist lenders would regularly offer 70% to 75% gearing in development finance.
Even though that has been drastically reduced to around 60% to 65% due to the pandemic, the deep market understanding that some specialist lenders have allows them to offer tailored solutions which effectively blend senior and mezzanine debt, pushing up gearing to above 75% even now.
This, in a nutshell, explains why the new generation of tech-powered, regulated specialist development finance lenders have been able to win over the hearts and minds of borrowers.