Property development finance in the time of Covid-19

Posted by Krios Capital Partners on 24th April 2020 -

Despite all the best efforts of established research houses to forecast the impact on supply & demand and property prices, etc.  it has proven to be a challenging exercise to assess the extent of the damage likely to be done to the property market in the medium to long-term.

There is debate at the moment as to whether we’re heading towards a V-shape or a U-shape recovery. The current consensus is assuming the former.

However, this assumption is predicated upon one key and fundamental postulate: the current lock-down and travel restrictions will ease down by the end of 2Q20 and life “will back to normal” by 3Q20.

As a result of this increasing uncertainty and implied execution risks, some lenders have just pulled out from the market until further notice whilst the active lenders have tightened their loans’ criteria and underwriting process.

In light of the above, our main advise to clients is to plan for the worst and hope for the best.

Whilst (at this stage) it is too early to quantify the impact of Covid-19 on property prices, supply-chain and costs, running a stress case scenario should be part of a project’s assessment:

• How resilient is the scheme assuming a prolonged downturn?

• What would be the impact on Loan-to-Value debt covenants if prices drop further, costs increase or the project gets delayed?

• Potential additional cash/equity required in case of costs overrun or breach of covenants?

Below, we highlight the key areas which require further consideration when starting a development finance process:

Valuation: when possible to undertake a site visit, a valuation report may not be relied upon by lenders as valuers themselves are finding it difficult to predict the impact of Covid-19 on prices (in the long-run) due to a lack of comparables and volumes.

Budget: with supply-side disruptions expected to inflate costs and potentially affect projects’ timetable, it is paramount to ascertain whether the scheme can still be viable assuming further costs escalation and construction delays.   

The development team: an important element of the underwriting process often overlooked. The main contractor’s financial soundness is critical as well as the professional team’s experience and track-record.  

Exit strategy: what is the fallback option in case the private sales do not materialise? That means looking at rental data and figuring out what your return is going to be and the potential lenders that would have appetite for a rental scheme.

War chest: cash is king; especially during a downturn. It is critical to build-up a cash buffer to ensure any costs overrun can be covered swiftly to avoid delays or an event of default.

About Krios Capital Partners

Krios Capital Partners are a London based property finance boutique providing bespoke funding solutions for real estate whether it is the acquisition of a property, the recapitalisation of a portfolio or property development.

Our aim is to provide a one-stop-shop solution for property investors and developers seeking finance to enable speed of execution, a seamless process and, more importantly, a successful funding journey.

Should you have any funding requirements or just want to talk to a member of our team, please get in touch today.

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