How LendInvest is inflation-proofing its development loanbook
LendInvest, the alternative property lender, is all too aware of the impact of rising prices on the UK’s construction industry.
Rising costs in the construction industry have a direct impact on supply and therefore the pricing of housing, which is relevant to the lender because its Real Estate Opportunity portfolio provides a significant amount of funding to support the construction of new homes.
It noted that a combination of higher input costs and supply constraints has caused contractor insolvencies to spike, with the figure up 85 per cent over the year to the first quarter of 2022.
The prospect of a failed contractor poses a significant risk to both developers and their funders, adding delays and extra costs to a project. It is also very difficult to find a replacement contractor at a comparable price in today’s market.
Read more: Institutional investment: Big fish, small pond
Wages in the construction industry are also on the up. Vacancies in the industry hit 48,000 on three occasions in the year to April 2022, the highest figure since records began 21 years ago. This combined with general wage inflation across the UK, has led to significant wage increases.
The Hays/BCIS Site Wage Cost Index, which tracks changes in the costs of UK construction labour, showed that all-in site rates were eight per cent higher during the fourth quarter of 2021 compared with a year earlier.
Protecting development loans
In spite of these challenges, LendInvest said its development loanbook had proved relatively insulated to-date.
“Firstly, we lend to developers rather than contractors, with fixed price contracts between our borrowers and contractors helping to mitigate cost risk,” explained Robert Pritchard, head of funds management, and Alexandria Snee, a fund services associate in a recent blog.
“For those developments where our borrower is dealing directly with subcontractors, the additional contingency we included on the underwrite of the loan has allowed for the absorption of cost increases,” they added.
In addition, the firm has taken additional steps to protect the fund from the potential risks associated with inflation. They include:
- Reducing involvement in larger development schemes
- Targeting a lower overall leverage level for development loans
- Including a greater level of contingency in appraisals
- Greater focus on the financials of main contractors
- Moving development lending to floating rates to benefit from a rising rate environment
With these measures in place, Pritchard and Snee are confident that their portfolio is well positioned to survive a period of higher inflation.
Read more: LendInvest doubles loanbook
Expanding bridging loan criteria
Elsewhere, the firm has also broadened the criteria for its regulated bridging product, a move that will benefit more homeowners seeking support while refurbishing new properties.
The updated criteria now covers clients with building regulation approvals and heavy refurbishment as part of their bridge.
LendInvest has also increased the flexibility it offers with the charges it takes. The firm is willing to take a first charge or second charges on either the property the borrower is looking to purchase with the loan, or the property they currently occupy. This is decided by the firm’s underwriters based on the exit strategy, liquidity and loan-to-value ratio.
Read more: LendInvest predicts surge in buy-to-let remortgaging
