"With 3,400 UK brokers left, the number of options that have both expertise in finance and the property sector is diminishing."
- Michael Ward - MAF
In the current climate, finance options, including refinancing, are vital for developers to expand, strengthen and build. But as licensed credit broker numbers fall, identifying the right advice to access these options is becoming harder.
Data from the Financial Conduct Authority (FCA) outlines that since the beginning of 2020, there has been a 47.5% drop in sole traders and partnerships with credit broker permissions.
This decrease is particularly prominent in sole trader numbers. In the past 12 months, there has been a 22.8% decrease in sole traders with a credit broker licence. Not only has this reduced broker options for developers, but one of the unique selling points of a sole trader broker is the long-term client relationships, business and industry understanding they have.
This drop comes at a time when we are seeing multiple alternative lenders enter the market, offering a variety of rates and packages for developers.
On top of this, developers are requiring finance for a range of purposes. This includes restructuring existing finance agreements, refinancing to unlock the value held in current assets, investing in growth, and starting the development of new projects.
This has created a highly complex and competitive situation. It seems there are fewer roads to finance due to falling numbers of credit brokers, but more destinations as lenders enter the market. To add greater complexity, many of these lenders will be better at providing for some purposes than others.
The result is that it becomes progressively harder to identify the lender and the finance package best suited to the developer.
An increased picture of distress
While the difficulty of identifying the right package becomes harder, the need for this financial advice in the property sector is becoming greater.
Data from Red Flag Alert suggests that distress is rising for companies operating in the construction industry. Statistics show that 100,000 construction companies are labelled as being in ‘significant’ financial distress. Of these 100,000 construction companies, 12,000 are categorised as businesses in the construction of domestic buildings.
Despite this distress, a further dive into the data finds that many of these construction businesses categorised as being in financial distress have a liquidity ratio of around 1. This means that of those 12,000 housebuilding businesses, many will have a clear option to leverage the value of their existing assets through refinancing.
Having these assets and this option available is crucial. Finding the right lender could mean they can release cash back into the business, or consolidate their current financial agreements, providing developers with an arrangement that guides them through times of uncertainty into a period of growth.
This is why it is important to identify the right finance, and with 3,400 UK brokers left, the number of options that have both expertise in finance and the property sector is diminishing.
The current scenario then presents itself as one where demand for refinance is rising, and as options for broker advice is falling. This ever-narrowing of potential pairings between developers and brokers means only a percentage of developers in need of refinance will get in contact with the lender who meets their requirements.
However, it must be considered that part of the reason for falling numbers of credit brokers could be consolidation. These larger, consolidated firms are often able to provide a larger panel of lenders for developers, which can deliver competition and a better deal for the developer on finance.
What do lenders want?
In this current climate, developers need to know what they can do to maximise their chance of receiving a finance solution that aligns with their needs.
Developers must be able to provide detailed business plans, outlining their intentions for their project, how the finances will be used, and how they plan to repay, leveraging their knowledge.
In addition to this, it is important to show that they have an accurate valuation of the assets they own, and that they know of any future income which may be committed to invoice.
The importance of relationships
For developers, they will want to see that brokers have ideas. How the funding for a project is to be structured is very important, as many lenders are working with brokers to build new financing that can work for developers.
Has a broker got a good enough relationship with the lender to consider changing areas, such as the balance between how much of a project is funded through equity and how much is through borrowing? A strong broker relationship with lenders often results in more favourable terms being negotiated, making it an easier journey for developers.
As credit broker numbers fall, the roads to choosing the right finance can be trickier. Nonetheless, many providers are able to deliver the finance needed for growth. If developers can choose the right broker to give them the advice needed and be equipped with the knowledge of the broker market, then they can take on the opportunities and overcome the challenges of the current environment.
