Specialist Lenders Are Offering Higher Gearings
Paul Watson is the Head of Origination at Blend Network. In this article, he talks about gearing as a competitive edge of specialist development lenders.
Cash is king and ‘gearing is queen’. Over the past decade, a new generation of specialist development finance lenders have emerged that have sped and simplified the borrowing process for property developers and investors. But gearing, often overlooked, is specialist lenders’ strength. Paul Watson, Head of origination at specialist lender Blend Network, explains how gearing has become one of the key reasons 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 particular deal. In the case of property lending, gearing is typically measured as the percentage of debt vs equity over the property’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 vs the equity in the deal is high, it is considered ‘highly geared’ and if the debt vs the equity is low, then the deal 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, the development finance lender would want to ensure that if the value of the property declines, the borrower is not over-leveraged and can afford to service the debt.
While cash is king, many property developers will agree that ‘gearing is queen’. 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 £1,000,000 into a single deal, the developer could spread the equity across several deals by using debt. This also reduces the developer’s risk by lowering their exposure to one single deal and spreading it across several deals. 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 to offer a good deal to the borrower and minimum risk to the lender.
Higher levels of gearing are also among the key reasons specialist development finance lenders have been able to gain a competitive edge over traditional banks and non-specialist lenders. 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 lending, let alone offer high levels of gearing. As specialist development finance lenders, 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 60-65%. For example, we recently funded a £2,600,000 facility which blended senior and mezzanine debt and geared it to close to 75% as a loan to Gross Development Value (GDV).
Pre-COVID, specialist lenders would regularly offer 70-75% gearing in development finance. Even though that has been drastically reduced post-COVID to around 60-65%, the deep market understanding that some specialist lenders have allows them to offer tailored solutions which effectively blend senior and mezzanine debt and pushes 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.
Blend Network is a next-generation specialist real estate development finance lender. The company, based in London, is an active lender all across the UK regions including England, Northern Ireland, Wales and Scotland. More information can be found at www.blendnetwork.com. Blend Loan Network Limited is authorised and regulated by the Financial Conduct Authority (Reg No: 913456)