Michael Primrose explains their growing importance:
Understanding exit strategies is a vital component of releasing equity in building projects.
Yet surprisingly, many people we talk to don’t have a plan. They either get stuck on expensive finance or in a situation where they can’t exit quickly enough. A developer or property investor’s ability to be agile in the face of change when it is needed most is critical to their planning processes.
Increasing levels of demand for broker support in structuring exit plans are being caused by transaction backlogs and the pandemic’s impact on labour and materials which has lengthened build times.
With sales taking longer to complete it is evident that projects are more and more reliant on adapting quickly and easily to changing, often unexpected circumstances. It is because of this, that well-structured exits offer a large degree of resilience against repossessions, defaulting on finance, or all of a sudden having to switch to default interest.
Yet, it’s not just about being reactive. Considering several exit options has its own rewards – allowing more time for sales or refinancing, saving money on a deal, or releasing vital equity allowing developers to invest in other projects. Having one option alone is too high a risk. You need an option A, B, C, and D because markets will naturally shift and products change over time.
Early adoption of these ideas will stand developers in good stead. Exit loans apply when development is at the second fix stage or when it has reached near or practical completion, with the main aim of potentially raising more cash. Essentially, they enable financial goals to be reached, therefore a lot of credence should be given to “hammering out a strategic view” as early as possible. This is because developers who have a vision and who apply these principles are more likely to have a strong build and exit plan. They are more aware of their outgoings and have a more realistic idea of how long it will take to see any returns, with clarity over the numbers.
First-time developers can also benefit by helping them to maximise more profitability than perhaps the initial loan can bear. Generally, they begin projects on more expensive development finance than the more experienced but can reap rewards later by starting with a more expensive development loan, getting the build done as quickly as is humanly possible, and then refinancing to save interest overall on the project. So if, for example, they’re paying 12% interest on development finance over 12 months, they can take it for say 9 months and then refinance at 7%, 8%, or 9% per annum to bring down the interest costs for the remaining three.
Having options especially when it can end up being more cost-effective is a powerful thing to have because it can up the profit on your deal. The markets have also recognised this and lenders are responding avidly with innovative product design, and niche offerings, coupled with rate cuts, particularly on bridging finance. Therefore, supporting the importance of a good exit both in the current climate, but also with an eye on the future.