Review of 2017 and the year ahead

2017 is coming to a close and despite a troublesome financial market, Arc & Co. have had another successful year. As a team we have organised and structured over £450m of loans.

Although the headlines suggest a volatile market, there has been an increase in the amount of liquidity available and the majority of funders are still keen to deploy money into both development and investment transactions.

We have arranged 70 loans across the capital stack throughout the year, ranging from a 17.5% LTV investment facility on a central London property, up to 95% LTC/75% LTGDV on large residential developments.

Please find below a list of products we put in place throughout 2017:

·         Development & conversion loans throughout the capital stack

·         Bridge loans to purchase

·         Bridge loans to purchase, rolled into development facilities

·         Development exit bridges

·         Investment loans for purchase or refinance (in many cases releasing capital for re-investment)

·         Bridge to purchase and stabilise, rolled into long-term investment money

In 2018 we hope to do much of the same using our expertise in structuring real estate loans for all areas of the market.  If you have any transactions in the pipeline for 2018 that you would like to discuss, please make contact.

Nick Holding-Parsons

Nick is a professional debt advisor specialising in structured asset finance for UK and international clients. In the time Arc & Co. has been running, it has built strong relationships with a wide range of different funding lines to suit our clients' specific property transactions, whether it be development or investment projects. Unlike your typical advisor/broker, we do a great deal of underwriting in-house which means we can quickly find the best solution for our clients.

Tel: +44 (0) 20 3205 2129
Mobile: +44 (0) 79 7350 632

Market Update

Up until the last recession, developers would normally structure their debt with traditional Senior banks like Natwest, and if they needed higher leverage they would add mezzanine finance to sit behind the senior loan.

Since 2008, the traditional senior lenders have either retrenched from the market or become a lot more conservative on allowing the developer to structure mezzanine behind them. This has resulted in the emergence of new lenders who have the ability to provide whole loans, or ‘stretched facilities’.

These funders, who typically have mandates from institutional funds or family offices, have now gained a sizable market share and are becoming the market norm. These lenders will lend up to 90% of total cost at a rate of around 10-12%. If you compare that to the traditional method and calculate the blended rate of the senior loan, usually at 6% and the mezzanine loan at 16%, the blended rate is in the single digits.

We can clearly see that the market is now swinging back in favour of the traditional way of structuring and as the market becomes more competitive, rate compression is likely to
happen. On top of this, the market is seeing more willingness from senior lenders to accept mezzanine to sit behind them.

The most important part of the deal is not always the price; it is about completing the deal in a timely and cost-sensitive manner. Traditional structuring does throw in other problems that you should consider. Inter-credit deeds must be negotiated and agreed between the senior and mezzanine lenders, and on top of this your professional fees, such as for lawyers and surveyors, will be a lot higher due to two lenders being involved.

A development project very rarely runs on time. If a time extension is needed, the developer will have to negotiate with two lending parties rather than having one port of call.

To summarise, it is a positive sign that the market is seeing increased growth in development lenders and it is great to see that the traditional method of structuring debt deals is returning and expanding. Stretched lending is a good way to simplify a deal and save on fees, but most of the time will not be as cheap.

For developers, any increase in financing options available is always a positive sign, but as the market expands for both stretched and traditional financing there will be more emphasis on the broker and their quality of advice. If advised correctly, the developer can maximise their financial return by using the traditional method.

Bank of England's Base Rate Increase

Following the Bank of England's Base Rate increase many lenders have followed suit, increasing the cost of borrowing across the market.

This news didn’t come as a surprise as mortgage rates have been at an all-time low for a sustained period. It’s likely that as both swap rates and the cost of commercial borrowing increases we will see lenders edge their rates up again over the coming months.

It’s expected that in addition to the increase in rates a further tightening of criteria and maximum term due to the uncertainties ahead with Brexit.

If your mortgage is due for renewal in the next four to six months now is the time to lock in the competitive rates and more lenient criteria. Most mortgage offers are valid for between three to six months, so even if you are fixed in until the Spring you can arrange your new mortgage now.

Contact a member of the Charnock Hughes team for advice on the best rates available for your circumstances.

Arc & Co. advises Ktesius on landmark residential scheme in central Brighton

John Kerrigan, Director of Arc & Co. Structured Finance, has successfully advised the developer, Kteisus, on the acquisition and construction finance for the Astoria Cinema site in the heart of Brighton.  The project has full planning consent for the demolition of the existing building to create a mixed use scheme comprising of 70 private residential units, a gym, TV room, ground floor commercial space and 72 cycle spaces.

To assist the purchase and subsequent development, Arc & Co. structured a facility in excess of £20m with an institutional development funder.  This enables Ktesius to secure the site and deliver the development in 2019, forming a new mixed-use residential-led scheme which will bring vitality to the area.

John Kerrigan said: “Arc & Co. are proud to have supported Ktesius to achieve the purchase of this landmark development site in the centre of Brighton. We look forward to assisting them with their future funding requirements”.

Ken MacRae from Ktesius added: “John and the Arc & Co. team are extremely focussed and effective, and we will certainly engage them in the future to advise on debt structuring.”

Arc & Co. advises Inspired on funding for two home county residential schemes with a combined GDV of £27m

The first, Bridge House is a 61-apartment scheme in Chertsey includes a £12.9m senior loan from Amicus.

Bridge House, an early 2000s office building, will be refurbished and extended to provide 39 one and two-bedroom micro-apartments and 22 standard-sized one and two-bedroom apartments close to Chertsey Bridge and the River Thames. The scheme has an estimated GDV of £20.4m. Chertsey is an employment hub with Samsung, Sony, Toshiba, Procter & Gamble and McLaren all nearby.

The second secures £5.2m for a 25-unit build to rent scheme in Farnborough includes a £3.9m senior loan from Octopus.

25 two and three-bedroom maisonettes off Westmead in Farnborough town centre will be refurbished and reconfigured to create high-spec flat shares for rent on a room by room basis. The scheme has an estimated GDV of £6.2m and is situated just 0.4 miles from the railway station for a fast 34-minute train to London Waterloo.  

John Kerrigan, Director at Arc & Co. Structured Finance, said: “The completion of these two high calibre development transactions, along with the £44m Impact House development loan, concludes a very busy, but successful period for Arc & Co, Inspired and our funding partners. To complete three development transactions of this scale and complexity could not have been achieved without very close working relationships between all of the key parties involved.”

Keith Aldridge, Managing Director at Amicus Property Finance, said: “We are delighted to have been able to support this project – a relatively complex deal, driven to success by an experienced and proactive developer and broker, plus valuers Kempton Carr Croft and FieldFisher who managed the legalities. Overall, this is a great example of where effective stakeholder collaboration worked in partnership with our experienced underwriting team to deliver a great result.”

Emma Burke, Head of Development Origination at Octopus, said: “We were delighted to work with Arc & Co., one of our key partners, to structure and fund Inspired’s latest development scheme with our new 65% LTGDV low cost senior stretch development product. This is an extremely well-located residential scheme and forms part of an exciting development portfolio.”

Arc & Co. advise Inspired on securing £44m development loan for flagship scheme Impact House

Inspired Asset Management has secured development finance for Impact House, its £90m GDV, 235-apartment scheme on Croydon’s Edridge Road.

A total of £61.5m was raised through a blend of senior development and mezzanine finance. Arc & Co. advised on the structure of the £44m senior loan from GreenOak.

The development will comprise 197 one and two-bedroom micro-apartments and 38 larger one, two and three-bedroom apartments built to the nationally described space standard, including four exclusive duplex penthouses. Residents will also have access to a ninth-floor communal rooftop terrace and a Wi-Fi Ready club lounge on the ground floor. The apartments will be designed to a high specification, including hardwood flooring, granite worktops and designer bathrooms.

Predominantly a permitted development scheme, Inspired received planning permission to convert the upper floors of the former office building to residential in April this year.

Built in the 1960s, Impact House was extended and refurbished in 2010 before being purchased by Inspired for £25m in 2015. With construction commencing this month, the iconic 16-story building is set to undergo a radical transformation that will see it stripped back to the core and reskinned with an all new contemporary residential facade.

Commenting, Martin Skinner, Chief Executive at Inspired Asset Management, said: “We are thrilled to get funding for what will be our largest scheme to date. The team has worked extremely hard to get it over the line and it is probably the first time in six months that I have seen my finance director with a beaming smile. One thing is for sure, this is going to be a special development that is going to make an Impact in Croydon.”

John Kerrigan – Director at Arc & Co. Structured Finance stated that “Arc & Co. have been privileged to advise Inspired on the funding structure for Impact House, from acquisition right through to development. It is true testament to the quality of this flagship scheme, and the calibre of Inspired, that a development facility of this size and complexity has been structured.”

With prices starting at £304,950 for a one-bedroom micro-apartment, more than 100 apartments have already been reserved.