Development lending as a service

By Michael Dean, principal at Avamore Capital

In the past 18 months, the development market has seen a sharp rise in finance providers. In particular, we’ve witnessed a number of bridging lenders moving into the space. While an increase in funding options seems to be a positive change for brokers and borrowers, we are seeing that this product shift isn’t always seamless. From Avamore’s perspective, we’ve been speaking to our borrowers and brokers to find out what it is that they value most over and above anything else: it’s having access to a decision maker, clear and open communication throughout the process and being able to place trust in your lender to perform.

Development finance is attracting increasing numbers of bridging lenders most notably because the cost of borrowing for bridging customers has fallen dramatically – even for non-regulated cases. Most bridging lenders have a fairly static cost of capital (relative to the market) so in the face of reduced rates, it results in squeezed margins and reduced profitability.

This trend has the potential to misconstrue overall market success. At Avamore, we consider development lending more of a service compared to bridging, which is comparable to a commodity – namely a function of who is offering the best price and/or LTV. Development loans are generally more complex with a need to factor in a number of risks and individual borrower requirements. Accordingly, we have witnessed the consequence of borrowers and brokers opting for cheap loans from lenders with less experience. This is particularly problematic when you consider the reputational risk of those involved in the project.

We are often approached by brokers to refinance bridging lenders that have turned their hands to development lending. In some instances, borrowers are faced with stalled projects and perilous situations. We feel it is worth development finance clients considering the entire package, not just the rate offered. We have been told by our brokers and borrowers that our knowledge, expertise and outstanding client service is invaluable, which makes us stand out among our competitors; comparable on price, but also excelling in service. During a development project, things will inevitably change, and a lender has to be prepared to be dynamic and flexible, as we have to be at Avamore. The opportunity cost of a stalled or failed project is dramatic and we think it is important to be mindful of that when sourcing development finance.