Developers grappling with possible rise of development finance costs
Recent interest rate hikes have seen borrowers looking to fixed-rate deals in order to provide assurances of their monthly mortgage repayments.
The rising rate environment has highlighted the importance of fixed over variable rates on development finance loans for property developers – a complicated topic, according to Barney Illes (pictured), senior lending manager at Blend Network.
“‘If rates go up, will my development finance costs go up?’ This has been the question on virtually every property developer’s lips over the past few months,” he said.
Illes explained that the answer is yes and no, as it depends on whether developers are using fixed rate development finance facilities or facilities with a direct link to the Bank of England base rate.
The Bank of England raised interest rates to 1% earlier this month, which represents its highest level in 13 years.
Many industry figureheads are expecting the base rate to continue to rise over the course of 2022, which is likely to push more borrowers towards fixed rates over trackers.
Illes said that if borrowers are using variable rates with a direct link to the Bank of England rates, then the current rate hike cycle means that their pay rates or total cost of their debt have already increased in line with the higher base rates.
“However, if they are using fixed rates, then the cost of their debt remains unchanged throughout the loan cycle, therefore providing them with increased certainty,” he added.
Fixed rates have traditionally been more popular than variable rates with property developers because most developers prefer the security they offer when interest rates are forecast to rise, according to Illes.
“With the Bank of England warning that inflation could hit 10% by the end of the year and the Bank determined to do whatever it can to rein in the soaring prices, many developers have raced to the certainty of fixed rates,” he said.
UK inflation has risen to its highest level in 40 years, with government figures showing the Consumer Price Index (CPI) rose by 9% in the 12 months to April 2022, up from 7% in March.
The previous record high occurred during a recession in March 1992. Many industry experts believe if inflation and the economy continue on their current path, another recession is possible.
Illes said that not all lenders are able to offer fixed term development finance loans because a rate hike could mean that the lender’s source of capital becomes more expensive.
“Blend Networks’ source of funding, family offices and ultra-high-net-worth individuals mean the lender has a fixed cost of funds and can therefore offer fixed rates,” Illes said. “Indeed, it recently announced that it had secured £120 million committed capital from a syndicate of family offices to deploy at fixed rate in the market.”
Looking back on the issue of a continued rising base rate, Illes said property developers already have enough on their plate with challenges such as the rising cost of materials and skills shortages.
The cost of labour was also a factor behind the spike in operating costs due to the ongoing skills shortage that has been drastically exacerbated by the pandemic.
“Property developers do not need more added sources of uncertainty, and that is why fixed rate development finance facilities have become so hugely popular in recent months,” Illes said.
Illes said that was also one of the reasons Blend Network have always believed in fixed rates as opposed to variable rates.
He said the firm had a team of experts with backgrounds in property and finance that allow it to understand what developers need and provide some much-needed certainty.
“Fixed rates put developers in control by eliminating the uncertainty around the cost of their debt,” he said.