PROPERTY DEVELOPMENT

Property Development and Finance



Property Development and Finance

Introduction

The basis for this article is the similarly titled dissertation, “Aspects of External Finance Available to and Used by Property Development Companies”, submitted by the author in September 1993 for the award of an MBA specializing in finance. The research was undertaken to assist both property development companies, especially first time borrowers, who were considering raising external finance and those who advise property development companies on the potential sources of external finance.

There is a lack of published information on various factual aspects of property development finance. Therefore property development companies have had to rely on their own knowledge and experience or that of their advisers. However the author considered that there was no commonly held consensus among experts about the answers to various pertinent questions which property development companies trying to raise finance may have. For this article the author has selected six subjects which may assist those attempting to raise finance. These are: the length of the typical term loan, sources of debt, the security required, the margin over base paid, the lending fees incurred and the treatment of interest. In the case of each subject the current choice of property development companies will be compared with what is offered by the property lenders.

Background

The results which are presented below were researched by postal questionnaire. In July 1993 questionnaires were sent to 530 property development companies. These companies had been telephoned in the previous year and had confirmed the name of their managing director, their address and the fact that they were predominantly engaged in property development. The companies could be included in the database in three separate ways. First, regardless of their size, if they were located in Central London, which was defined as being bounded by Hammersmith to the west, Camden to the north, Docklands to the east and Oval to the south. Second if they were located in the South East of England and occupied office premises with a rateable value of £10,000 or more. Third if the company was one of the nation's 5,000 largest companies.

Eighty-five usable replies were received. This represents an effective return rate of 16 per cent which would be considered high for a mailshot and is made more impressive by the fact that the information requested was of a sensitive nature.

In August 1993, 200 questionnaires were sent to potential providers of property finance.

What Is the Maturity of Your Typical Term Loan

Obviously most property development companies would have more than one loan; this necessitated asking about the “typical loan” (this was in fact true of most of these questions). There were five choices: “less than 1 year”, “1-2 years”, “3-4 years”, “5-9 years” and “10 years and over”.

The percentage results of these choices were respectively: 9, 23, 28, 26 and 14 (see Figure 1). Therefore there was no particular maturity of the loans to property development companies.

The question posed to providers of property finance was different: “Will you consider issuing a loan for the following maturities?” ...