In Part 1 of this series, I outlined how delays associated with the Gateways under the Building Safety Act (“BSA”) have created new project risks for developers and lenders alike whilst they wait for, or plan for the additional programme time required to obtain, the relevant Gateway approvals from the Building Safety Regulator.

Mind the gap

The longer procurement programme requirements of the BSA and associated delays with the Building Safety Regulator (“BSR”) are contributing to the emergence of funding gaps, which raise the risk of developers having to meet the resultant increase in interest payments and other finance costs under their loan facilities, from equity or other sources. In more extreme scenarios, these delays and longer procurement programmes also raise the risk of developers breaching various covenants under their loan facilities and, in a worst-case scenario, falling into default. It’s a difficult situation and one which is at risk of being exacerbated by the relative inflexibility of the traditional requirements and tenure of a typical 3 to 5 year development loan facility. As an aside, it is arguable that part of this inflexibility in the market is a by-product of the past retrenchment by clearing banks from the development funding sector, with the gap having been filled by other capital providers, driven by a fixed income and/or longer-term capital model.

As I mentioned in my last blog, there’s now a real onus on both developers and lenders to adapt their strategies (whether that’s procurement, funding or otherwise) to mitigate the impact of these delays. As such, we’re increasingly seeing developers return to bridging loans – a straightforward and effective solution which has been a staple of the real estate market for years.

The basics of bridging

My colleague, David Jerrard, wrote an excellent piece last year that provided a comprehensive overview of bridge lending. To quickly summarise, it’s typically a short-term financing solution for developers who are either nearing or have reached completion on their schemes and are now transitioning to the sales or lettings stage, the existing development loan has reached (or is nearing) maturity, and the incumbent lender needs to be repaid before the underlying development is cash-generative. At the other end of the spectrum, a bridge loan can be used pre-development, where a developer needs more time to obtain planning, finalise procurement or obtain Gateway 2 clearance before a development can commence. Bridge lending therefore provides much-needed support and flexibility to developers in these shoulder periods, where additional time is needed.

The benefit for developers is clear, pre- and post-development bridge loans provide an effective way of keeping projects afloat amid the rising tide of delays, longer procurement programmes or clearing the various Gateways with the Building Safety Regulator. Bridge loans have, therefore, emerged as an indispensable tool in the armoury of developers and one which is increasingly being offered by non-bank lenders (“NBLs”).

The ongoing role of non-bank lenders

Compared to traditional banks, NBLs like Precede, often have more flexible mandates, varying pots of capital and are less impeded by the potentially inflexible procedures and policies of larger institutional lenders. NBLs should therefore be able to pivot far more quickly towards offering new and bespoke products, tailored to shifting developer and market demand.

From our perspective, one of those increasing demands is the need for more bridge capital solutions within the living sector. This was one of the key drivers behind Precede’s decision to launch its own bridging product earlier this year, which provides loans of £5m+ on terms of 6 – 24 months to fund both pre- and post-development phases of UK real estate living projects. The flexible pricing, leverage and ability to roll interest for the loan term, alongside the speed and certainty of execution, is indisputably attractive to developers looking to mitigate the risks of longer procurement timetables and/or BSR approval delays at any stage of a project, whether as a result of the BSA or otherwise.

In addition to offering an alternative avenue for capital deployment, bridge loans can help counter the impact of unforeseen delays on traditional development loans, which could otherwise increase the overall level of risk and act as a drag on developers’ expected returns. Bridge lending, therefore, complements, both pre- and post-development, a lender’s traditional development loan offering as well as providing the opportunity to de-risk development loans by offering an alternative financing solution either at the beginning of a project, pre-Gateway 2 (during the planning and procurement stage) or post-Gateway 3 (during the sales or stabilisation period).

Bridging loans are by no means a silver bullet to some of the delays associated with the introduction of the BSA. However, out of all the options currently available, these short-term loans may well provide the most immediate relief for developers and, due to the rise of NBLs bringing additional and alternative sources of liquidity to the UK’s real estate finance funding market, are increasingly a product which developers can readily access.