After a structured asset finance career in the City, Piragash Sivanesan aims to bring large corporate finance know-how to the everyday property developer. We have a housing shortage in the UK and so property developments and conversions into homes for people to live in is both in high demand and potentially also offers great rewards too. However, it is not quite as simple as it may seem, but Piragash walks us through the ins and outs of development finance and the 3P’s of a development project: people, project & place.
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Resources mentioned
The Major Development Group UK on Facebook
As with Craig Snider last time, Piragash Sivanesan is happy to give his time to walk through the different options and providers that operate in the major development financing space.
Piragash Sivanesan’s contact details:
- Email: p.sivanesan@totumfinance.com
- Tel: 0845 519 6043
- Mob: 07815 574 787
- Web: totumfinance.com
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Today’s must do’s
Interested in development and conversion projects…yep, me too! A great opportunity in the current climate I would say, so make sure you have a chat with Piragash to get the low down…or have a chat with me about some of our development opportunities if you like too!
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and it’s a pleasure to have you join me on the show again today.
Sometimes people say to me that they cannot believe that the information that is shared on The Property Voice podcast and blog is free, which of course it is. The fact of the matter is that we all get to grow and develop as a result of some of the fantastic guests and subject matter that we get to trawl over each and every week. It is an absolute pleasure, in fact, to be in a position to do this and I get a lot out of it too!
Today is no exception, as I am joined by the founder of Totum Finance, Piragash Sivanesan, who has a wealth of knowledge about Development Finance I can tell you.
From a structured asset finance career in the City, Piragash aims to bring large corporate finance know-how to the everyday property developer. So, put your feet up, sit back and relax as you have a listen to someone that really knows how to get your development finance project funding approved…after all, he used to the be the man that said yes or no when he worked for RBS and Lloyds in the past.
Richard: Hi everybody, it’s Richard again. And I’m joined today by Piragash. Hi, first of all, just let everyone know you are there.
Piragash: Hi everyone
Richard: Good to have you join us. And I won’t say…well I will say actually, because you have given up some time over the weekend, so I really want to appreciate that and acknowledge that in advance. So, thanks for giving up some time at the weekend to do this recording for us. We are in the middle of a series, on financing in property, we are going to talk about a wide array of different financing solutions. We already have done and Piragash, you are going to talk to us today about Development Finance. What I normally ask a guest, such as yourself, coming to join me on the show is, just give us a brief introduction into yourself and your background and why this is a good specialist topic for you to be talking about today.
Piragash: Great, thank you. So, my background is really Corporate Investment Banking, for the last 15 years, doing Structured Asset Finance. I have been working in different banks, Lloyds, and then latterly RBS. I worked in the Credit department, underwriting, and really making the decisions, when, your listeners are making a request for finance; I have been involved in the structuring. Which I think is critical for any banker, because you really understand why, when things go wrong, they set up as there, and also on the frontline in terms of structuring deals. So, for most of my career, it’s being involved an asset that’s had some element of construction. Sometimes its property, sometimes it can be things like an oil rig for example, and then they sometimes put it into a mortgageable asset, where a bank will put a mortgage and lend against, and ultimately that asset produces an income. And I set up Total Finance about 15 months ago. The real reason was to give a level of expertise, that we would normally give into a FTSE company to the SME, small time property investor and developer.
Richard: Excellent, well it’s funny actually, I spent some time in Asset Financing, perhaps in a slightly different context, but I was looking at equipment related financing. So, interesting that we have had that type of background. It’s fascinating the whole Development Financing piece. So, why don’t you just kick us off, why don’t you just explain what actually is Development Finance, and where does it fit into the overall financing landscape for Property Investors and Developers.
Piragash: Sure. I guess, its most basic. Development Finance is where you are taking, in the context of Property of course, you are taking your asset, and you are fundamentally changing it, you are developing it. So, I’m not talking about a brand-new kitchen, and perhaps some new walls. I’m talking about something where you are making structural changes to the overall design, or extending. Really, when we talk about Development Finance, its often with ground up developments or perhaps more latterly and quite popular, is the commercial to residential conversions. So really something where, you buy an asset worth, let’s just say for example, £100. You are really spending in excess of £40 to alter the make-up of the asset. Traditional lender, so for example, let’s just say for example, your Buy to Let lender, wouldn’t necessarily to be seen to be financing or holding a 25-year loan, while you are completely changing the make-up of the asset. And that’s where Development Finance comes in. To break it down, let’s just say, normal Development Finance spreads between land, so you buy some land, then you might get some planning on it, then you might have construction period, and then finally your sale period. Your typical Development Finance offering, encapsulates that last two pieces of the puzzle. Not so much land purchase, not so much planning but the construction and the sale components of the financing.
Richard: Ok. So, would you have to do something else to acquire the land part then?
Piragash: Again, there is always a yes and no. If, for example, you bought some land with planning, then you wouldn’t necessarily have to do that. You can purchase the land and the constructors part of the Development Finance Loan. But, if it’s just for example, you decided to buy some grazing land, the chances of planning are 50/50 or 40/60. It’s unlikely that a Development Lender would actually want to lend on that piece, until you get full planning. And it’s almost one of the reasons why, you have got an industry that’s called Planning Game, where you take a piece of land, you add planning and often the value of the land shoots up. But, when we talk about the different ways of financing—feel free to reign me in Richard…
Richard: No problem!
Piragash: One of the areas is, people who don’t have much funds can buy a piece of land speculatively...the type of lending you would probably get on a speculative piece of land is maybe 50% Loan to Value, occasionally a little bit more…but when you get planning on that land, especially if it’s high density, by that I mean several houses or several flats, the value of the land will really shoot up. And that extra equity, that you will have created, so for example, you bought the land for £100, and now, as a result of get the planning its worth £200. When you now go, and get Development Finance on it, you will be able to talk about the equity, that you are bringing to the deal; the skin of the game, that the banks always like to look at as the planning that you created. That extra £100, that will then form the basis and then ultimately you will look to get funding on the £100 that you haven’t put in, plus whatever the construction costs are thereafter.
Richard: Yeah, so I was driving at how, we can answer this in a different way or explore it in a different way, because Development Finance is a component part, perhaps isn’t it, of an overall mixture or basket of different financing that you could look at. Development Finance is specifically targeted, as you say, with heavy spend, in changing a property or land, from its current situation or current use, into something else. Typically Buy to Let, light refurbishment is 15% spend or less. You would have a heavy refurbishment type of concept and that might be up 25%, 30% probably tops. And then, Development Finance, if you are going to be spending quite a substantial amount of money, as you suggest, 40% or more. You can see how it fits in, and that’s what I was going to ask you. Where does Development Finance fit in, generally more from an industry perspective, where does it fit into the overall landscape, and how does it work? How does it work is probably a better question?
Piragash: Ok, where it fits in, you have got to spend something more than 40%. The thing about it is, your typical lender will look at a property if you are massively altering it, and if they are providing a Buy to Let loan on it, they are uncomfortable providing a term loan on something that’s drastically changing. Actually, the margin that they get, they need to be certain that there is an income flow. And of course, once you are drastically changing an asset, chances are there won’t be income flow. That also started to hint at where Development Finance is. Development Finance and developments generally, are actually pretty risky. When you buy a Buy to Let property, generally speaking, the asset is habitable, and straight away tenantable. But of course, once you are drastically altering a property, build something from ground up, there are multitude of things that can go wrong. A Development Lender is there to understand all the risks and to manage that, to believe in your experience in order to be able to execute that building. and then, to be able to then provide your lending on that basis. Now, actually, Development Finance, the way to look it is to almost work backwards. So, for example, when you put a bridging loan on something, you look at the Loan to Value, you can get from the bank, to work out how much equity you have got to put in. Similarly, with a Buy to Let, you might look at the income flow, then you would look at 65, 75, 85% Loan to Value. Well, on a development loan, it works kind of backwards. You might start with what’s called your Loan to GDV. GDV means Gross Development Value. I mean, what is the value of your completed product. So, it maybe for example, £1 million, and a lender may be able to lend, for example, 60% Loan to GDV. Which basically means they are willing to lend you up to £600000 of that £1 million. It gives them plenty of profit, effectively that’s the margin. So, your costs could go up, or your GDV could go down, but it presents a buffer for the lender. Now, from there, they will deduct the sale costs and also the construction costs that they would lend you. Typically, they like to lend you 100% construction costs, and will come onto why in a minute. And finally, they would then add back the interest that they will be charging you, because the other thing about Development Funding is that—and something that’s critical, absolutely critical, about financing, is you have got to approach a turnkey funding solution. That means that, once you start constructing, you know, that you have got all the funds to finish the project. In Development Funding, there are no prizes for coming up 100, or 200k short. Because a site which isn’t finished, which isn’t fully funded, is going to be a huge, huge problem and it could result—that’s where some of the real big issues turned up in 2008. So, just to reiterate, Loan to GDV, your construction costs, your interest costs, your fees, professional fees; all of these costs are covered, then of course, whatever is left…typically then provided towards the loan. Sometimes people can get very hung up on…what is my day 1 Loan to Value, how much am I going to be able to get against this property I’m developing or this this commercial unit, or for example, this land. And actually, the way to look at it, is the word backwards. So, what is the end product, and then work out how much is left to put towards the land. Because often, that is the biggest risk for a Development Lender, because…and this is where often, Development Finance lenders, quite like the idea of an individual bringing the asset or the land, and providing 100% development fund. The reason is that the security of the land is considered, generally speaking to be static, it provides the most certain type of security. So, if you own a land that’s worth £100000, with full planning, it’s always going to generally be worth £500000. You can then, if the lender was to not provide you anything for the land…for every £1 they to loan, technically you are then going to start construction and create an extra £1.25 or £1.35, or £1.4 of value. So, for every £1 that they put in, value is constantly being created, so their security cover is nicely being managed. And the overall security package. Which is how they look at it. Of course, thigs can go drastically wrong at times. And that’s when really understanding the document is the only thing that’s really important. Does that answer your question, Richard?
Richard: It does a lot, yeah. I guess, the surprising thing is more that they tend to look at percentage of GDV, in the way you have just explained that. But I understood, that major Development Funders, would look at all of your costs and advance against that. Maybe section out the existing land and building cost and then your construction costs and interest fees as separate items, and lender percentage against that. But I guess, they will still have an eye on the GDV, won’t they? The reason I ask that question, is that, if the project doesn’t get completed, of course, the GDV doesn’t get realised…
Piragash: I guess what I should say, in the first instance, when they are working out what kind of overall loan should be made available, they will look at the Loan to GDVP. The second thing is the Loan to Cost. So, although they are willing to lend a certain amount of the potential profit, they will also want to make sure that you have some skin in the game. And this is where for example, if you bring just the land, that’s quite a big element of the cost that you are putting up. Sometimes the land can be very, very cheap, the cost of the building, for example, up North you may get a very cheap piece of land with a huge site, but actually all the cost is certainly in the construction. As you say, in order to manage their risk, what they will do is, they will drawdown funds—those funds are conceptionally agreed on the GDV, then they will draw down funds based on the schedule of works to ensure that a…you are using those funds efficiently and in the way in which your Project Plan intended. So, that they can step in if there are any issues. Sometimes you will get lenders which will step in very positively and that will work with you and sometimes you get lenders who will push you quite hard and turn off the taps. Ultimately as a percentage of costs that you have incurred, they will refund you that money that you have spent.
Richard: Yeah exactly. They are not necessarily just going to write you a cheque on day 1 they are going to want to see milestones being hit and releasing money on pre-planned drawdowns as they go. But, equally, they are going to play an active role in the project, because they are going to want to see he progress and, as you suggest, perhaps prodding you a bit, if you are behind schedule. Maybe even, you said, turn off the taps, they could actually stop giving you the money. Hence, it’s a very different type of landscape here, isn’t it, from a funder. The relationship is different, their engagement, their activity level is very different as well, compared to say bridging lenders and Buy to Let lenders. That’s the spectrum we are looking at.
Piragash: Yeah, absolutely. I suppose there is 2 things, 1…this is not one of those situations where you should allow your solicitor to be the sole region of the loan agreements that are being put in front of you. You need to understand what drawdowns look like, what do you need to commit to, what do you need to be able to achieve in order to be able to get new funds, what is the timeframe of the play, understand all the commercial elements of your loan agreement, because you will be testing it on a constant basis. This is not like a Buy to Let situation, where you may never choose—to be honest, for all loan agreements you should read, but probably never test the various clauses. Whereas, you can be sure, in a Development Loan you will constantly be testing the various clauses and you will be utilising funds on an ongoing basis. So, it’s really, really important that, if you don’t get it, to get your solicitor, to get your broker in fact to sit down and talk through all the commercial items, understand how you will be getting funding, so that there are no surprises. You know then that, presumably you run a professional operation, and you know what you need to get out of your builders, what you need to get out of your site team, in order to be able to get the next stages. How you need to be able to interact with the banks’ monitoring team, so that they are quite happy to forward you your funding. But, the bit I always like to pick up on is, sometimes there will be, I’ve seen some people using bridging to do property development in the sense of, almost constantly re-valuing the value of the property that’s being re-developed at different stages, in order to get more funding. And I have only seen things go wrong in that instance, because often there is a massive disconnect. There is a difference between valuing your overall building and the value of it versus actually valuing the cost that you have input into the development and understanding how the funds will then be released in order to meet your next stage, because sometimes the value of the property won’t have actually increased by very much, despite the fact you have spent a lot on it. And that’s where development funding is really created for this purpose. Whereas in some instances people put on bridging products which are inappropriate for what they are trying to achieve.
Richard: Yeah, I’m glad you said that. I always talk, I’m sure you wouldn’t have heard, but I always talk about having the right financing solution for the right project. So, just recently, this is totally out of context for this specific discussion, but just recently someone was talking to me about a Flip Project, it was a refurbishment on a Flip, and they wanted to get a Buy to Let mortgage. They were saying I’m looking for a Buy to Let mortgage, with no early redemption penalties because that’s a cheaper solution than bridging, and I’m going this is wrong. It’s inappropriate, first of all the lender is not going to like that very much, second of all, there is a risk that you could get blacklisted for Buy to Let lending, because you are using long-term funding for a short-term project. We could go on about that type of conversation, but people will do it, and of course, they have an attitude…if I pay 3% on a Buy to Let loan versus 10-12% on a bridging loan, it’s cheaper. But there are risks of doing that, and one of which I have just highlighted, the same as you have just highlighted here, in the difference between bridging lending and development finance. So, I’m glad you brought that up. Maybe flipping the coin a little bit, let’s just talk about, what is the opportunity right now for property investors and developers, what sort of projects on a practical level would you say lend themselves and what are the hot topics…you already mentioned a couple, but it would be great just to get a list and then talk about what type of projects are coming across your desks at the moment, where development finance is being utilised?
Piragash: I guess, there are numerous things really, as a general rule, I don’t think people should necessarily let their finance rule their strategies. If your understanding is, having a strong Buy to Let portfolio, maybe right now it’s all about understanding Serviced Accommodation or HMOs. Development and construction generally, involves a certain level of skill and experience, that often you will bring into your team via your builder or your QS or your architect. But it’s also not something that I think people should play at. It’s absolutely critical, that people are a master of the various—or bring in people that are masters of the various tasks that need to be done. Having said that, I do not need to be telling your listeners that we have a housing shortage. I do not need to be telling your listeners that construction, development, planning games present some quite big opportunities for profit. But, they are also very different from investments, because actually we are talking then about a trading business, rather than one that is a passive investment. Now, the thing about a trading business that I find really interesting and something that people in property, as I see it, are only just starting to get on board with, is really the brand. When you are a trading business, the value of your business is in excess of net asset value. What I mean by that is, it’s worth more than your bricks and mortar. So, for example, you pay probably less of a premium to About Homes Development, than say something by the Candy brothers. Ultimately the bricks and mortar are probably not that different, the end result is more in the marketing, the execution and the value that its perceived that you are providing. And that I think, starts to get really interesting and really exciting in terms of what you can build genuinely that you can then live with your growth in terms of a funding perspective, but also in terms of income generation and ultimately a sale of business. So, talking about things that are very much alive at the moment, clearly the PD rules. I mean that people can get involved in development that are very much conversions. Now, on one hand its pretty good because you can buy a building often. You can perhaps by a building, an office on bridging, while you decide what you want to do with it. You can maybe add some planning to it, or you can just convert as is. There is a different sort of regulation in terms of the builder regulations required versus a ground development. It can be more accessible but there are risks. Sometimes when experienced developers that I know, when they look at conversion projects, their contingencies are a lot higher, some of them are 15% if not 20% bracket, because sometimes you can unearth something that is just not singular in terms of the building. Whereas on a ground up development, once you have got passed the foundations, it should be fairly easy to build, because there is less issues that you are dealing with. But, the really exciting thing, from a finance perspective—I have to apologise to some of the listeners now, this is where I’m going to get a bit geeky, but, is that its accepted in Development Finance that you will have tranches of different forms of funding. And what that really means is, you can start to use more of other peoples’ money. i.e. less of your own. and the reason why that’s accepted is that, in London for example, if you are going to do a decent size development, you are probably in the £3-5 million in terms of site purchase, and then £3 million plus in terms of construction costs. Up until recently, the banks would offer quite a high leverage, something we would call Stretch Senior, but since Brexit that’s paled away a little bit. So, what this really means is that, if people can imagine a rectangle, and that rectangle represented 100% of the funding that you needed for a project. Now, for the first time…if this rectangle was Buy to Let, you would be looking at a split of 65/35 for example, between the debt that a bank would give and the 35% of equity that you would put in. And that would be it. But, actually the development piece, we can put more layers, and the reason is twofold, one-there is more profit to play with, which means that you can give more costs of financing. Because the more complex you get, the more cost it’s going to be both in terms of legal costs and also fees and just complexities. But now, for example you might take a senior debt bank, and they will give you 50% of what you need, of that triangle, and then you may get a mezzanine bank to provide say 25%. Then you may get a preference so in terms of your equity, you may take out some preference shares, preferred equity for say, 10%. Then you may get a JV partner, so a preferred equity is the guy who will take a loan and receive a flat 12%. Your JV partner may put in another 10% profit share. And finally, the sponsor equity will be provided by you. And that element, is effectively, massively reduced, because you the fact that you can split out various forms of funding. As a general rule, lower end you are in that triangle, the less risk you are taking, because you are naturally secured, by the primary type of security. And the further up you are, the less chance you have got of getting your money back, if things go wrong. But you tend to get a bigger reward. And just that concept, is what I find really interesting about Development Finance. And actually, it’s how a lot of the more sophisticated developers operate and how they are able to do a lot bigger deals. And of course, size comes more profit.
Richard: Yeah, I can see why maybe having pictures and that sort of thing can help here. I might talk to you about how we could do that later on. Started with a rectangle, ended up with a triangle, but got the same picture, that essentially you build blocks. You have got debt, other types of debt going on top and equity partners and the bottom line is, the top slice. Its top of the triangle, the right-hand side of the rectangle. Could be as little as…5-15% of sponsor equity as you call it?
Piragash: It can be, absolutely. I mean, you know your broker will know who is the best person, who is the best lender comfortable with all those various different stages and generally speaking, if you are a decent Senior Debt Lender, everybody else is subordinated; and by that, I mean they will be able to make no decisions until the debt bank is happy. But ultimately, why it’s really important to understand is, you might not be the sponsor equity in this case, and they may be listeners who are actually just investors, and they may be approached by someone to do a Development Finance deal. And actually, understanding where you are, in that triangle, or in that rectangle, is really important when it comes to pricing. Because, sometimes people will just say…yeah, sure, I will accept 6% or 10% because I’m secured in some way so I’m very relaxed. But actually, not understanding that, the bank below them that has more priority, actually is maybe charging more. Its then where the sophisticated investor will really understand where they sit. And it’s a good way for them to benchmark how they should be pricing. When perhaps it’s not their deal, but they are just investing in a deal.
Richard: Great. So, you mentioned PD; Permitted Development. Permitted Development, for example, turning an existing office block into flats or apartments, would be an example of that. As a range now, the government I think have made it permanent now, haven’t they? Permitted Developments. What you said about housing shortages, so turning brown field sites, which is abandoned office blocks, or warehouses, and this sort of thing into living space, would be an example at one end of the scale of, potentially where Development Finance could come in. and, of course, as you say, ground up developments, so taking a plot of land and building houses or apartment blocks, would be another example on a practical level. They are the two main areas are they, that you would tend to see?
Piragash: Yeah. Absolutely. Sometimes you may look at someone who is purchasing a bigger commercial site that requires a little bit more, in terms of getting involved in planning. But of course, and often many of us will want to do a development project but not necessarily have the funding to sit that and land make effectively and wait for the planning to come in. Giving you a complicated—the reason the government has really pushed this concept of PDs is; the idea is it just takes the whole planning equation out of the mix. Although, I would certainly urge people to ensure they get the relevant certification to ensure that the development that they are proposing does in fact, sit under PD rules. Sometimes people get carried away, with having PD and actually start wanting to do stuff that’s out of PD and it can then create issues in terms of building regulations. So, even if you believe you site is fitting under PD, it’s always good to either get confirmation from a professional consultant or preferably more directly from the council.
Richard: Ok, good. Thank you. We talked a little bit about benefits, other peoples’ money is certainly one of them, that comes to mind. And having a finance partner that understands what you are doing is another one. Maybe we can pick up that. But, really what I wanted to get into is how could a investor, or developer more likely, get themselves ready for raising finance with a Development Finance provider? I guess there is some key things they need to do, or to be able to demonstrate at least.
Piragash: Yeah absolutely. I think generally, when it comes to Development Finance, we try and look at the three Ps; that is the Person, the Project and the Place. So, the person, a person or people—when I say this, if you don’t feel you have one of these things, then you can always JV with someone to bring that relevant experience or background. But, does the person, do the company have the ability to execute on what they are proposing. If, for example, we are talking about a 20-unit development, ground up, have they done anything like this before? If the answer is no they haven’t, that the sort of thing that’s going to start to worry a bank in terms of presentation. You can bridge that bringing in a builder or a developer that’s done this sort of thing before. The second thing is to what degree does the person or individual have the ability to get more funding if things go wrong. Something that’s been really—something that you have probably not seen in a few years, because actually since 2008 the market has always gone up; is that when a project goes wrong and it requires more funds, generally a bank will support putting more money, because actually while we have all been standing still building stuff or digging into the ground, the GDV, then end sales unit, has actually gone up. For the first time, we are in a situation where it may stay the same or go down. So, the ability for the bank to put more funds in is, more difficult. So, understanding the wealth behind the group of people is important. But also, your access to more funds. So, this is where if you are a more sophisticated company, you have raised funds via the crowd or you have raised funds by public markets, or you have good investors that are always ready to invest in the company, it provides an opportunity for you to say there will be money to put in, if something goes wrong. Some lenders look at roughly 20% of the loan, or 20% of GDV being available, net assets, in terms of personal guarantees. So, they are the sort of things we look at in terms of the person. You know, what sort of experience do they have and what kind of background do they have. Then it comes to the Project. And this is where I would really encourage your listeners, if you are going to do a development, to really be a master of your development appraisal and all of the different components. So, you start with your site, what is your site worth, what sort of planning is required, what kind of acquisition costs, do you understand the concept of how much stamp duty you have got to pay, how much professional fees you are putting in, are these professional fees capped, is there are risk of these going over. In terms of the site itself, yes you are going to purchase it, but there is probably reports you will need to do. Environmental reports, all sorts of things to ensure you can start building on this. Are you aware of all the costs, the knock-on effects if those things don’t come in as expected? The construction itself, what kind of costs, what kind of contingencies do you have, Section 106 payments. Have you thought about all these things in terms of, do you have a minimum, does your project work without it, are you going to fight it? Professional fees, who are you going to employ on the site, apart from your main contractor, the instructor, the QSs etc. And the finally your GDV, your end product, how confident are you, what sort of comparable analysis have you done, have you gone out to two sets of estate agencies, so that you have done your own analysis, but you have also gone to an independent party. Perhaps, you have gone to the extent of having your RICS red book survey done on the end product, that the bank has used. All of these things, once you start to present them, we always encourage when we put our deals forward for Development Financing, that we work with our borrowers, to make sure that we have got a really nice pack that contains all this information, so that, when the lender looks at it, you come across as someone really professional and ready to, do your first project.
Richard: And then the place I guess, is the actual location?
Piragash: Sorry, yeah. The place absolutely. Its all about location. For example, you may be building it in an area that’s due to have huge re-generation. Bring that out, talk about the availability that can buy your product. If you building £6 million townhouses in an area that typically has working-class people that can afford houses at £400-500000, then there is a mismatch. You are understanding the area that you are building into, the appetite for—also, things like off-plan and overseas investors to come in and support some of the marketing is all related. We all know, there are a number London and South centric lenders, albeit that they are starting to change a little bit. And starting to look up North, but it’s really important to understand your patch. Are you looking at an area that’s a town city, or is it a complete suburb? Or are you trying to create demand in an area that’s (inaudible) to date. These are all factors which the lender is going to consider, when they look at how appealing your appraisal and your project is.
Richard: Yeah and all this from a lenders perspective, looking through their lens. Answering their question; do these guys know what they are doing and if it all goes wrong, are we likely to get any money back? They are the key questions behind it, they are effectively advancing the funds, as you say, a lot of risk, a lot of moving targets so, they need to understand that. In other words, the developer, pitching to them, needs to demonstrate their capability. And it’s very much a business case sort of presentation, isn’t it? It’s not here is a property, lend me some money, that’s that. It’s much deeper than that, its cradle to grave type…looking at the project as a business and evaluating it, scoping it, doing the research, presenting the numbers, having contingencies, having the experience to know to know you are just plucking figures out of thin air, you have actually done some analysis, and third party reference points.
Piragash: And you know what, there is a world of difference between a developer that understands this point and around marketing. I would urge anybody that when they do their projects, whether its refurbs, prior to getting into the really big stuff, is to take pictures, have the video entries on YouTube, really create a great marketing portfolio that you can put in front of anyone. Because, that is what…we are all people at the end of the day, the underwriters etc., and when they see something that’s slick, clearly truthful, realistic and has been given a lot of thought, you are making it so much easier to get the funding.
Richard: Yeah, I think that’s absolutely critical. In anything like this you need to showcase yourself in the best way, to some pretty hard-nosed financers. Good piece of advice. I guess there is quite a lot of, how to prepare yourself, what other projects, what are the potential benefits. I guess, we shouldn’t let you off without saying what are the potential downsides from a developers’ perspective, what can catch them out, what do they need to watch out for?
Piragash: I think ultimately, when you do a development, there is a lot of hope capital in the project, and this is that you are hoping to create something. History is laden with people who are hoping to do something, are they able to do that. The consequences of not adhering to your plan, to your development program is something that need to be considered very, very carefully. Often, when you have a Buy to Let loan, you can afford to put all your deposit sometimes, into the project and hope it starts cash flowing. In a construction project, there is no cash flow until the project is finished and having you plan b, plan c, plan d, is absolutely critical. Because sometimes, you may get some get Development Finance, subject to planning, the planning might come in, it might take a lot longer, it may eat into your profits, you may not have a deposit to purchase the site. When you are constructing you may think that you have got a JCT contract—guess what, a JCT contract does provide a fixed basis, upon which you can act with your main contractor. But there is a whole load of items out there that he or she can actually pass on costs that aren’t described in your contract. Understanding all these things are critical, because again, ultimately, if you have got £100 million and you are doing a £1 million project, chances are you are always going to be fine. But, when you are in project where, you may need more cash—I was speaking to some very, very experienced people, and it is so rare that a project; I mean so rare, like 0.005% of a project actually finishes exactly how it was planned. Now, you may end up actually to budget, but it would be of no relevance to the actual plan that you had, when you started the project. Yes, you used your best ideas, but all of these things mean that often you have got your own personal guarantee; which means you are putting your homes at risk, or you are actually eating into this. And if things go drastically wrong, the bank can’t just sit there and say, well I’m really sorry this hasn’t worked out for you, we will just sit here for another while longer. That can sometimes be the biggest downside, is that, the reason people want to do developments is that the numbers are so attractive. But you need to understand your downside, you need to your downside with various investors, you need to understand your downside for you. Because, let’s just say, if you don’t lose any money but your investors do, you can kiss goodbye to your investors ever coming back. Looking after your investors and making sure they don’t lose any money, is absolutely critical in this business, if you are going to be using investors going forward. Because, you need them on project 4, 5, 6, 7, not just on 1 and 2. So, there is a lot that can go wrong in a project. And to help you understand there is a contractual agreement, and actually running through the various things that can go wrong and having a plan b, c, and d is so important to making this work.
Richard: Yeah, I think that’s really sage advice to be honest with you. I think people when they look at returns in property, development is at the upper end of the potential return curve, as it were. But equally some of the risks are, some of the returns have to be high, to be able to cover some of the risks that you take. And they can disappear very quickly. If planning is held up. It has to go to appeal. You get a couple of units knocked out, you know, big chunks of profit can be carved out as a result of that. Interest costs start accumulating, there is all sorts of things. And as you quite rightly say, it’s like a cascade of events that you don’t get the drawdown you are looking for, the bank doesn’t give any more funds, then potentially, they start calling in the personal guarantee. They will probably take back the site, sell it and maybe fund the losses on disposal, other investors lose money so your reputation gets tarnished, you lose money, you lose reputation, you certainly lose profit. It can quickly go that way. I don’t want to paint it in an overly negative way, I want to bring this out, that whilst on the one hand there is attractive potential profits, there are significant risks as well. Much, much more than there are with Buy to Let, in terms of passive investing types of channels. Fair point?
Piragash: Absolutely, and the other thing I would add to that, you summed it up really well, I think the other thing about it—there are profits to be hard, but equally we had got into a market, certainly up to Brexit, whereby one planning was on a site, often the margin for the developer has been really squeezed. Everybody wants to get into development, you would normally expect a healthy 25% profit margin, certainly London 20%, and then to 15% and really this becomes a race in terms of cost to finance. So, if you are a cash buyer, and you can afford no interest costs, you can effectively afford to bid a lot higher for your land, because it costs you less to actually build out and this is also where it’s really important for someone to understand, consider all the plan b’s and plan c’s, consider all the cost that could happen. You need to be really sure about what…when you bid for a piece of land or conversion project, you need to be able to understand for you, what is the optimum price of what you can bid. It doesn’t matter if someone can bid higher, it’s got nothing to do with what you can do. Because they maybe a cash buyer, there may be a multitude of different things, could be using other peoples’ money and actually they are just taking a fee, it could be a builder that’s building at cost, and all these other factors mean that, every project will have an optimum price for you and you alone. And you need to focus on that. And always be insular to whatever is happening on the market. Which is why, more and more…especially if you are starting out I encourage people to, I know it’s not easy, but to get off market deals, because when you are starting out you need the time to process the type of structure you want to put on that land, but also more importantly, you need to be able to structure something that works for you and will work with the vendor, and not something that necessarily the market situation, especially if it’s a particularly nice site, those margins get bid out. It’s a real, real problem and actually, that’s why the people that have some money have some sense, will actually focus on some of the land planning. Because it’s actually in the planning and changing the land that you start to add value and therefore the projects that you bring investors, will have naturally more margin and so naturally are more fundable as well because there is just so much more equity in there, rather than something you are trying to buy on market with planning, it becomes incredibly competitive for someone that’s perhaps inexperienced.
Richard: Yeah, I can see that very clearly. Been looking at a few projects recently and doing the exercise that you just described, what’s it worth to me, and then you suddenly find projects are just going for way above that price. For very different reasons. But very competitive and I think you summarised it really well. Thank you for that. I was going to ask you a question, in fact, we talked before we came on air about resources that you might have, and I think you said that maybe you wouldn’t necessarily have one, but I thought of one, while we have been talking. Of course, you manage a Facebook group, don’t you?
Piragash: Yes, I do. You mean Major Developments?
Richard: Yeah...do you want to just share what that Facebook group is and what it’s about?
Piragash: Major Developments, is an open Facebook group for people that are considering, or would like to be, and interested in learning about how to developments. We have got loads of types of people there, from QSs to architects to developers and builders, to land people, and sources who will be able to help you on your journey.
Richard: Yeah, it’s a useful resource for people to go and find, have a look and do some research before ploughing into this. I think drawing some conclusions, and draw a closing a little bit; you have shared so much and you clearly know your stuff, just tell us a little bit about what you do on a professional level and maybe how people could connect with you and pick up the conversation after they have heard this show. How do they reach you, where do you work and what service do you offer?
Piragash: Ok. Thanks very much Richard. So, Totum Finance, you can find us on the web, totumfinance.comwe are on Facebook, myself and my colleague Craig Snider, who I believe you interviewed last week on crowdfunding, are available to answer any questions. The way we operate, so both of us we have a background in property and structured asset finance, we offer a free advisory service, so when you have first got your development, or your bridging deal or your commercial deal that you want to look at, we will help you, we talk you through, as opposed to giving you something very generic and something like that, I’d much rather sit down and try and understand your background and how you are looking to execute on a particular project, whether you are bridging or its development. And then we will start to source, in terms of, not only an info memo that represents you but also the types of lenders that will best fit you. Crucially, in terms of our practice, we don’t get paid until your loan draws down, which means, we are really a true partner and we are vested in insuring your product, your loan goes ahead, we have got access to 150 development and bridging lenders. Which should also give hope to people, there should be a lender out there. As long as your project is profitable, if experience is an issue or funding is an issue, there will always be an opportunity to get your project funded. I would encourage everyone to get in touch with either via email, Facebook group or directly on our website.
Richard: Fantastic. And you have given a lot of information freely and I have certainly appreciated to you, and for sharing with our listeners all that you have. So, all of these contact details, will be in the show notes so people can get a hold of them, obviously, they can listen to the recording and there will be a transcription done of this so, I’m sure they can find you one way. Just before final wrap up, is there anything you are thinking Richard, why didn’t you ask me this? I really need to tell you this just before we close! Anything like that?
Piragash: No, I think we have covered everything really well. I think the critical piece is developments and development funding shouldn’t really be entered into without professional advice. And that goes from broker to lawyer, your conveyancing lawyer that you use on the Buy to Let stuff, may not necessarily really be the right one to work with you on the development stuff. Your architect, your builder, all of these people, plus the education that you choose to take up. Whether on land planning or be in terms of development or regulations etc. this is all super important. And you know, that’s the important thing that you should be doing, but I would absolutely say that this country need to build and if you can find a way to build successfully, and to really be able to scale up from not just one or two projects but to 3, 4, 5, 6 projects, not only are you going to be able to certainly meet an ever growing demand, but you will be able to create a brand, which overreaches and goes beyond the physical work that you are doing.
Richard: Well I think that’s a great way of drawing to a close, to be honest, nice and positive, we do need lots more housing in one shape or form and that’s why it’s such a great opportunity. As you rightly say, doing it professionally and managing the downsides as you go. So, I’d just like to say thank you, I really appreciate your time today Piragash, and I’m looking forward to, hopefully getting, some of those triangles or rectangles drawn out, maybe if we could some sort of blog post for our readership audience rather than just the audio audience. If you would be up for that, at some point in the future of course.
Piragash: Absolutely, just not at the weekend.
Richard: Yeah exactly! I will give you your time back now! Thanks again, I will let you get back to your family now. Thanks for joining us, we really appreciate that.
Piragash: Cheers bye
Richard: Bye.
Property Chatter
Interview with Subject Matter Expert: Piragash Sivanesan.
Resources mentioned:
The Major Development Group UK on Facebook
As with Craig Snider last time, Piragash is happy to give his time to walk through the different options and providers that operate in the major development financing space.
Piragash Sivanesan’s contact details:
- Email: p.sivanesan@totumfinance.com
- Tel: 0845 519 6043
- Mob: 07815 574 787
- Web: totumfinance.com
Given the length and detail of this week’s episode, a very quick wrap up from me.
Development and conversions do represent a great opportunity right now in property and as Piragash said, we have a housing shortage, so the demand is very high. However, running a development project is unlike many smaller scale or passive investing projects and so a business-like approach is required.
To be frank, there are lots more I could add, but in the interests of time, I will merely signpost you towards Piragash, who would be more than pleased to talk to you I am sure. In property, we need to build a team of professionals around us that have specialist knowledge and contacts in the areas we wish to operate. This includes finance partners and in particular with a complex development funding project, so I am very pleased to have had Piragash’s insights on today’s show. Just mention The Property Voice when you do connect with him.
That’s me for this week then. By all means do email me personally if you want to talk about anything from today’s show or more general in property investing to podcast@thepropertyvoice.net, the show notes will be over at the website www.thepropertyvoice.net
Now all that remains is to say thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.
[…] After a structured asset finance career in the City, Piragash Sivanesan aims to bring large corporate finance know-how to the everyday property developer. We have a housing shortage in the UK and so property developments and conversions into homes for people to live in is both in high demand and potentially also offers great rewards … […]