We often have clients – usually property developers – who want to borrow to buy a piece of land which is just a plot, i.e there are no buildings on it. Sometimes it will have a planning consent which might be suitable for what the developer wants to use it for, or sometimes the consent needs to be altered for another use or an improved scheme.
This situation narrows down the lenders that will have an appetite to provide a loan without additional ‘make-weight’ security. Clients find that frustrating as they usually believe the purchase price reflects the true value and the land represents sound security.
So why is this?
- Firstly, the value is usually attributable to the planning consent. If it doesn’t have any consent but the buyer is confident and skilled at obtaining planning then there could be some ‘hope value’ in the purchase price. Lenders don’t lend against that and will rigidly stick to what their valuers state is the current value ‘as is’
- Lenders are always mindful of what situation they would be in if they had to take possession of the asset they are lending against. They are not planning consultants and know that if they end up having to manage the asset they face the challenge of following through to get planning agreed or amended, which is not their skill set
- If they do have to take possession and force a sale of the site, they face a hostile market for buyers. There is of course naturally a narrower market for land plots (as opposed to selling bricks and mortar) which will restrict the sale options. They also know that savvy buyers of land will realise the situation that they are in and drive a very hard bargain
The result is that there is a limited market for lending against land alone. Developers therefore may find that they must use bridging finance (some bridging lenders take the view that if it has a Title Number they can lend against it) then complete the planning and then refinance with a lender who will recognise the ‘Planning Gain’