In an environment of rising construction and finance costs, increasing regulation and a myriad of other challenges to overcome, it is now more important than ever that funding providers across the capital stack collaborate to support housebuilders and developers.
UTB and LDS recently worked together to provide 92% of the build costs for the delivery of a £10m development of 27 new apartments in Hornchurch, Essex. It was the first jointly funded scheme undertaken by UTB and LDS and there are others in the pipeline.
Here we talk to Mark Roberts (MR), Relationship Director at LDS Sales Guarantees, and Orla Costello (OC), Senior Director – Property Development, at United Trust Bank, about how Sales Guarantees can substantially increase funding available to housebuilders.
Who are LDS and what are Sales Guarantees?
Mark Roberts (MR) – LDS is part of the Landmark Group, a well-established single-family office and property investment group which has been trading for over two decades. LDS was created to help SME developers – a typically underserved but vital part of the market – build more homes. The amount of equity SME housebuilders are required to contribute to new schemes to secure funding can be restrictive, as is the risk of unsold units—and that’s where LDS comes in.
An industry first, our Sales Guarantee is an upfront commitment to purchase any completed and unsold properties on a site, and our 10% interest-free cash deposit – released on day one – decreases the equity required from the borrower.
How do LDS Sales Guarantees work?
MR – The first stage is for the interested party – be it a developer, broker or lender – to create an instant Sales Guarantee, at no cost or obligation, on our website.
From there, we will work with all stakeholders to optimise the structure and then proceed to legals. At this stage LDS will exchange contracts to acquire any completed and unsold properties, removing sales risk for the lender and developer.
We pay a 10% cash deposit on exchange which can be released to the developer, transforming their cashflow, reducing their equity requirements and driving their returns.
The developer is free to sell homes on the open market and will usually do this to maximise their returns. Upon each open market sale, LDS receives its deposit back and a small fee for providing the Sales Guarantee.
If any completed and unsold homes remain, the developer can call upon LDS to complete under the contract.
We effectively offer the ‘best of both worlds’, blending of the risk removal of off-plan pre-sales with the higher returns of open market sales.
What are your criteria?
MR – We support housing and suburban apartment schemes in England and Wales of 5 to 60 units and with GDVs from £1.5m to £35m.
Why can this be a good option for a developer looking to achieve maximum gearing?
MR – Firstly, there are no upfront charges; we use the senior lender’s valuation and IMS, we pay our own legals and there is no arrangement fee. Our fixed fee structure also provides greater cost certainty, when compared with compounding mezz interest, which becomes expensive should there be any unforeseen project delays.
How do LDS get introduced to deals?
MR – Most housebuilders and brokers use our online engine—the quickest and simplest way of starting the process. As we establish better relationships with lenders, such as UTB for example, we are seeing increasing introductions from lenders we work alongside. We are also now seeing repeat business from developers who have completed a deal supported by an LDS Sales Guarantee, liked how it worked and come back for their next project.
Are most developers seeking higher gearing on their finance at the moment?
OC – There’s always a trade-off for borrowers seeking to balance leverage and pricing on development finance. Higher leverage enables developers to retain their liquidity or apply it to additional projects depending on the opportunity value. However, this higher leverage is further up the risk curve and attracts a bigger coupon to compensate. As with many things it’s about balance and how the borrower optimises the capital stack for a development project – i.e. equity, subordinated/junior debt and senior debt.
Is there a particular profile of housebuilder seeking higher LTGDVs than they can get with just a senior debt and their own equity?
OC – Not really. It can be a housebuilder routinely delivering 150 units a year or 10. Like I said, all developers are seeking to manage their own capital/liquidity position when looking at funding structures and arguably this has become more important over the last 12-18 months where we’ve seen the cost of building homes rising faster than the sales price over the past couple of years. This puts the viability of private development schemes at risk.
Do you think Sales Guarantees might one day be considered as often as mezz finance as a means to reduce the equity requirement from a customer?
OC – There are various ways developers can capitalise a project and Sales Guarantees are another tool in the financing toolkit. One benefit of the Sales Guarantee for the borrower is about securing the sale of the project – giving them some certainty and/or a backup to selling on the open market. That might be a deciding factor in some circumstances for some borrowers.
What was the scheme UTB and LDS have just collaborated on?
OC – It’s a development of 27 apartments built on a site in Hornchurch once occupied by an old social club which closed several years ago and was subsequently demolished.
Why was this a good deal for LDS to get involved in?
MR – We were keen to support an experienced developer bring forward a scheme by removing the equity constraints that had stood in his way. Our deposit helped bridge this gap and made the deal one that could work for all parties, including UTB.
Are there any other deals in the pipeline UTB and LDS are working on together?
OC – Yes we’re keen to develop the relationship with LDS further. UTB has a track record of collaborating with various agencies and junior debt providers including Housing Growth Partnership, Homes England, the British Business Bank and several leading mezzanine finance providers to help housebuilders access the capital they need to fund developments and retain more of their equity. Having agreed documentation in place with LDS is an important step in paving the way for future partnerships. I currently have two other deals I am working on in conjunction with LDS and another director in the UTB team is working on a third. I look forward to many more successful collaborations in the future.
Reactions to the deal
After United Trust Bank and LDS Sales Guarantees joined forces to support the construction of 27 new-build apartments in Hornchurch, Essex, a project with a GDV of close to £10m, members from both the LDS and UTB teams shared their views.
George Logan, director of Laugan International Ltd, stated: “Throughout my interactions with the teams at LDS and UTB, Mark and Orla ensured I experienced a level of dedication and professionalism that truly sets them apart.
“This attentiveness made me feel valued as a customer and reinforced my confidence in their services and I was consistently impressed by their problem-solving skills. They took ownership of any issues that arose and worked diligently to find effective solutions, ensuring that I was fully satisfied with the outcome.”
Orla Costello, Senior Director – Property Development – United Trust Bank said: “UTB are delighted to support this exciting development and to complete our first deal with LDS. “With several more potential opportunities being discussed, we are certain this will be the first of many successful collaborations between UTB and LDS and we also look forward to supporting many more schemes from Laugan International.”
Ashley Marks, head of real estate at Excellion Capital, said: “This is an excellent example of expanding a developer’s capacity, while completing swiftly on the deal at hand – made possible through great partnership between UTB and LDS’s unique offering.”
Mark Roberts, LDS Relationship Director, commented: “This is another example of LDS working closely with lenders, brokers and housebuilders to unlock transactions and new homes. The Sales Guarantee is a powerful combination of risk removal and cash release in a market that is high in risk and low on liquidity.”
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