Brownfield development: a lender’s perspective

Obtaining funding comes near the top of the list when developers are asked about the greatest obstacles in brownfield development – but that’s not just down to differences in risk perception between developers and funders. “Brownfield” covers a range of sites – some a lender might run screaming from, while others just require a more careful tread. The vacant site with contamination will be assessed differently from one with planning consent and income to cover costs. The need for certainty For most lenders, the concern that a brownfield project might not be fully funded to completion serves as a great deterrent. Uncertainty over costs and questions on the deliverability of the scheme, particularly residential, can scupper a project as fast as the opportunity was found. Even with thorough ground investigation reports from trusted advisers (with large professional indemnity insurance policies on the line), there’s a real risk that any problems might be a lot worse than the report initially suggests. Depending on the former use, finding contamination during development is the unknown that can pose the biggest risk for developers and funders alike. In the event of a borrower’s insolvency, a claim for contamination can haunt a funder long after the transaction is finished. If a lender enforces its security, the Environment Agency could seek to enforce remediation of the contamination directly with the lender, regardless of who was the original polluter. The last thing we want is to take possession of a site where all the proverbial chickens have come home to roost. The same applies in satisfying planning conditions, which could become a lender’s responsibility. It’s one of the occasions when we rely particularly heavily on legal advice to understand the fine print and extent of our potential liabilities and obligations. Here, it really helps if your lawyers know exactly where you’re coming from as a business, and it can take time to build up this rapport – but it is well worth the time investment. Rights of light claims are another matter justifying specialist legal advice. Getting this wrong isn’t just going to hit profits. In an extreme case, an injunction could halt development. It’s one of those risks where the impact can be total. Brownfield is the future I strongly support repurposing land for new development, and facilitating this would ease the pressure on green belt land. The logic is strongest in the case of housing, where redundant or underused land in urban or suburban areas is likely to be in exactly the place where new homes make most sense – where communities and most of the core transport, utilities and community infrastructure is already established. In the same way, dilapidated industrial sites that have links to the strategic highways network are suitable for a new generation of warehousing. Changes in the retail market are obviously fuelling this shift, but it’s also the infill sites that we are seeing developers benefit from. Clearing the way Funding brownfield projects is evidently challenging. So how does a lender manage these risks while still engaging with opportunities? Pricing becomes a factor, as does looking for additional security or mitigations, such as increased contingencies. But we won’t build the relationships we want with the most visionary developers if we put all the risk onto them. We have found that, by seeking close partnership and with a deeper understanding of the moving parts (on both sides) we can work with our clients to overcome obstacles and provide innovative solutions. We have successfully supported significant projects for redevelopment in recent years, helping our clients leverage their skills to deliver their vision, unlocking opportunities for them. There is no one-size-fits-all solution. We can generalise to the extent that a sufficiently well-capitalised developer experienced in brownfield development would increase our appetite to get involved. These are the developers with the proven capability to pre-empt and deal with challenges. This rings true for our partnership with Ballymore. We trusted Ballymore as a partner to handle 31 acres of brownfield land, and Investec provided an £18m loan in 2017 to support both asset management initiatives under way and the longer-term residential scheme proposed at two light industrial sites in Silvertown, east London. Two years on, the group has continued to add value to the sites through active asset management. In the short term, the investment has been generating increased income, while, in the medium term, Ballymore will look to work up a residential-led, mixed-use planning consent focusing on housing and local employment. Squeezed profits A range of economic factors is making it more difficult to extract profit from development schemes. Vendors refusing to discount land they may have overpaid for in the last cycle, inflation in construction costs rising, and the risk of a departing labour force, particularly in London, all puts pressure on a developer’s returns. If an astute developer can look to acquire brownfield land at a discount to open-market value, these sites will become increasingly attractive investments. A lender will err on the side of caution in brownfield development, as the rewards just aren’t there as they are for our clients when the risk-taking pays off. The upside for the developer far outweighs the lender’s return, mitigated as it may be. But by ensuring that we are partnered with those best positioned to handle technical and economic risks, our intention is to continue to support the brownfield development that we regard as desirable and which delivers the housing and logistics projects we need. Provided there is proper due diligence and regard for risk mitigation, there should be no reason why well-capitalised, well-experienced developers cannot secure funding.. Erin Clarke is a portfolio manager in structured property finance at Investec Brownfield development: the legal perspective >> Brownfield development: one developer’s perspective >>