The Art of the Deal: Good brokers make it look easy

As last week’s PMI data revealed, UK construction isn’t just running hot – it’s white hot.

So far in 2021 the industry has witnessed the sharpest rise in activity since 2014, with housebuilding, commercial projects and infrastructure all surging as the country emerges from lockdown. With interest rates low and lenders itching to lend, you’d think this was an easy time to be a development finance broker. Booming borrower demand and an abundant supply of lender capital. Happy days, right?

 

Speed bumps as industry accelerates from zero to a hundred

But the construction industry’s growing pains are throwing up many challenges. And the brokers who are making deals look easy are often doing so not because the finance is available on a plate, but because they’re working exceptionally hard, and because they’re exceptionally good at what they do.

While May’s Purchasing Managers’ Index (PMI) data showed output growth at its strongest since September 2014, and new order volumes increasing at their fastest pace since the survey began just over 24 years ago, there was a sting in the tail too. Input cost inflation was also at a survey-record high during May, reflecting a surge in demand for construction materials and severe supply shortages.

The Office of National Statistics says worse is to come, predicting that overall material prices will jump 7-8 per cent in the course of the year – with timber prices already up 400 per cent. Paint, cement, steel and electrical components are all in short supply, and interruptions in supply mean cost and schedule overruns are worryingly common. The net result is that developers’ projected build costs typically need extra scrutiny. Responsible lenders and brokers will quite rightly ask searching questions about whether a scheme can truly be built for what the developer has budgeted.

Those developers most in need of a bit of extra headroom tend to be the medium-sized players, too large to be able to source everything locally and too small to benefit from the economies of scale enjoyed by the big beasts. As a result ‘squeezed middle’ developments of under 50 homes, while still completely viable, are the most exposed to the danger of spiking build costs – and it is for them that a good broker truly comes into their own.

 

Unheralded heroics

Often the efforts of these hardworking brokers go unheralded. It is their diligence and foresight that stops project hazards turning into a full-blown crisis. Yet as one lender remarked to me recently, “They often swim the Channel and get no more than a pat on the head for their efforts.”

Of course a good broker will often be as important to the lender as they are to the client. I’m thinking of the professional who is fastidious about their numbers and doesn’t shrink from the difficult conversations, highlighting the hurdles, mitigating the risks, and refusing to tell people only what they want to hear.

At Atelier, we like to move quickly and decisively when we see a scheme we like, but the old rule of thumb about price per square foot being everything when it comes to development lending has never been truer than it is today.

Our in-house monitors will pore over every decimal place in the costings, and under such scrutiny it quickly shines through when the broker has done his or her own due diligence and properly interrogated the data.

 

Partnership rather than a transaction

The best brokers never see a deal as just a transaction. It should be a three-way partnership between lender, broker and borrower. That’s why astute brokers will steer their clients towards funders who favour long-term, solid ideas over short-range sizzle. Another undesirable side effect of the post-lockdown boom is the emergence of a new breed of lender who appears to be here ‘for a good time, not for a long time’. Engaging such lenders, who frequently court deals outside their comfort zone, can be a punishing experience for borrowers as they discover any number of tripwires in the small print if things start to go awry.

Of course, the paperwork is only the start of the journey, and a good broker keeps everyone talking, sometimes until the last snag has been fixed. A case in point is the PBSA sector which saw developments around the country grind to a halt during the first lockdown.

It was edifying to see brokers who could have washed their hands of the whole business instead roll up their sleeves and dive straight back in to stop these highly time-sensitive projects from unravelling. With all the banana skins out there, I’ve often tried to imagine what our industry would be like without the vigilance of our brokers, but every time I try it fills me with dread.

As England gears up for its tilt at footballing glory at the Euros – which sadly for me, Ireland will not be attending – it strikes me that a good broker is like a star striker – who can pick out the net and score from 30 yards.

But a great broker is like a goalkeeper. Less feted, but oh how you’d miss them if they weren’t there.

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