What Immediate Effect Has The COVID-19 Pandemic Had On Residential Development Finance?

The immediate effects of COVID-19 on Residential Development Finance have arisen in the form of drastic disruption to the market, with many Development Finance and Bridging Lenders withdrawing.

Some are reducing LTV’s, resulting in uncertainty and a lack of liquidity for Property Developers. Lenders have withdrawn because they have liquidity issues; in other words, their funding lines have been cut. Others face the operational challenges of operating during the crisis and many face uncertainty over asset values. For those developers where the lender has ceased funding construction drawdowns (anecdotally this does not appear to be too commonplace), this is particularly problematic and brings back memories of the 2008 crash.

Disruption to operations has also been significant. Many construction sites have closed (all in Scotland by law), building materials are sparse, valuers and project monitoring surveyors have been unable to visit sites. The Government banned house sales and many residential mortgage lenders withdrew. Where valuations have taken place, the reports include, on the instruction of RICS, a ‘material valuation uncertainty’ clause re COVID-19. The valuer is advising the lender that less weight can be attached to previous market evidence for comparative purposes. Some lenders have chosen to withdraw because of this clause, others have reduced LTVs, and some have been pragmatic and ignored the clause.

In the last week or so, the market has begun to open up. House viewings and sales may now proceed, and construction sites and builders’ merchants are opening, in line with H&S guidelines. Initial data suggests that sales related activity such as viewing bookings and online searches has increased substantially.

The disruption will scar the short – medium-term market. Costs of construction may rise with stop and start costs, extended build programmes and restrictive H&S working practices. Disputes and claims between the developer and contractors may arise. Finance charges will increase. All of this will put pressure on the profit margin, and this is before any reduction in expected sales values is factored in.

The relationship between the developer, lender and associated third parties will be key to delivering projects.

What Actions Should Be Taken To Mitigate Disruption Caused By COVID-19 Where Construction Is In Progress?


First and foremost, it’s important to know the lender. Establish how they are funded and how robust this is. There must not be any doubts that the lender has the liquidity to fund the remainder of the project. The lender must also have the commercial nous to see the project through!

Critically, if there are any doubts about either of these things, then you’re going to need a Plan B. Unless third party 2nd charge debt or equity can be sourced, you will need to refinance out to a new lender.


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You should prepare a revised ‘Cost To Complete’ construction budget and cash flow taking into account any disruption caused and reappraise the sales values and timeframes and integrate these. Although the latter is easier said than done given the uncertainty over the market in terms of price and demand. From there, adjust finance costs to reflect any changes in the budget – cash flow.

If the resulting finance requirement is greater than the existing lending facility and/or the term requires an extension, engage in discussion with the lender immediately. The lender should already have been in contact.

Firstly you can always request that the lenders suspend interest for the period of non-activity. They may refuse but if you don’t ask you don’t get. If additional funds are required, establish where they are to come from. You as the developer? The lender? Perhaps a third-party lender (such as mezzanine 2nd charge) or investor? If an investor, on what terms? Will they require security; if so a 2nd subsequent charge? Or, as super senior debt where they sit in front of the 1st charge lender?


You should involve all parties in discussions and agreements regarding the financing of the project as required. This may involve a combination of you, the lender(s), your investor(s), contractors, suppliers, professional team, creditors and so on.

Review the main contractor or subcontractor JCT/Packages and aim to resolve any claims or disputes by negotiation rather than lawyers. This will save you both time and money. You must review the Terms and Conditions of the Facility and Security documents to establish whether a breach has or will occur. Question the lender as to how they would treat such a breach. Will they foreclose or forbear? If so, what are the costs of any action?

If a Personal or Corporate Guarantee has been given to support borrowing by a Ltd Co. or LLP then review the document to establish on what terms this may be called in. Always take legal advice, as is required on the aforementioned points.


Turning to the sale of units, consult with the selling agent to implement a marketing strategy. To list some ideas: off-plan sales and contractual exchanges, third party sales underwriting of any unsold units, discounts, incentives and so on. Involve the lender as they will have to agree to give away any margin and security.

If a workable solution can be found with the lender, ensure you know what the costs and implications are of non-delivery by you. If it’s not possible to agree on a workable finance structure with the existing lender, implement Plan B by refinancing via another lender. This could be either Development, Finish and Exit, Development Exit or Buy To Let, all depending upon the status of the build-sales programme.

This is part 1 of this piece into examining how the COVID-19 Pandemic has directly affected Property Development Finance with a focus on construction. Keep an eye out for part 2 which will discuss what the Housing and Property Development Finance market will potentially look like as we come out of lockdown and aim to identify opportunities.

At Optima, we broker Development Finance in the Residential, Student Accommodation and Commercial sectors in both the UK and Ireland.

We’re regulated by the FCA (Financial Conduct Authority) and broker finance for a wide range of legal entities to include Limited Companies, Partnerships, Limited Liability Partnerships, Sole Traders, Trusts, and Offshore Vehicles.

With over 35 years industry experience in sourcing Development Finance we have the knowledge, skills and contacts to secure the finance most suited to your needs, be it amount, pricing, ease of underwriting or turnaround time.

If you wish to discuss the content of this article, a specific project or the market in general please do get in touch.

Gary Walsh | Optima Property Funding Ltd

T +44 (0) 207 205 4200

E finance@optimafunding.co.uk