Lending opportunities and current challenges
As the demand for private healthcare grows, more small to medium practices are looking to refurbish and develop their premises to meet that demand. Development lenders are adjusting to this growing market opportunity but in the meantime those seeking to raise development funds would do well to seek advice on how best to navigate current funding pitfalls.
A recent case based in Surrey will help to illustrate the point. A private healthcare practitioner bought a high street commercial unit and successfully secured planning permission to refurbish and extend the property creating several hundred square feet of modern consultancy D1 space. D1 is a category of land use under the Town and Country Planning (Use Classes) Order 1987 (as amended). It covers several non-residential institutions including clinics, health centres, crèches and day nurseries amongst others. The practitioners’ intention is to provide lettable serviced space to other private consultants.
Commercially, the business plan makes good sense. The area in question is affluent and there is a lack of local and accessible space to support growing private healthcare demand. As traditional retail use continues to decline on the high street, there is an opportunity for alternative uses and D1 is one of these.
However, from a lending perspective, a case like this can fall between two stools and possibly more.
The works to the premises were substantial enough to be classified by most lenders as development. However, the client is not a developer. Their experience and knowledge is healthcare. An important prerequisite for development finance is the ability to evidence a solid track record of previous successful projects. Notwithstanding the borrower was considered a very credible candidate, the application stalled with several lenders because the case couldn’t be classified into their lending criteria. The healthcare team couldn’t take it on because the works constituted development and the development team turned it down because the client wasn’t a developer.
Any lending proposal has to meet the lenders criteria to be successful and it is worth considering the process from their perspective. Lenders continually analyse their loan book to develop lending strategy. Lending criteria puts this strategy into practice. It enables the lender to decide using defined parameters the property, the borrower and the levels of debt they are prepared to lend on. The criteria sets out loan to value limits, debt servicing ratios and the returns required for the actual and perceived risks taken. The criteria and strategy are continually responding to the market and the wider economic context. In our case study, lenders found it difficult to classify the proposal into their existing criteria and this can be a frequent problem with small to medium healthcare development projects.
Some lenders had issues with the status of the end user. The vast majority of practices are classified as owner occupiers and lenders like them for one very simple reason. Historical analysis over the years (and property cycles) shows healthcare owner occupiers are less likely to default on their obligations compared to other property borrowers. As a sector, healthcare carries less risk and lenders will offer higher loan to values and more competitive debt pricing as a result.
In the Surrey case, the business plan was based on receiving rent for serviceable space and some lenders considered this investment. Investment lending terms can be more onerous then those offered to owner occupiers and again a seemingly good match was derailed.
Healthcare development is usually considered as commercial development, which can be disadvantageous. Residential development on the other hand is the primary focus for many lenders given the well-established undersupply of housing nationally. However, there is a strong case for lenders to take a nuanced approach to healthcare development at this scale. On the whole, developers are focused on the exit. Their commitment to the project ends when the finished product is sold. In contrast, healthcare commitment continues past the point of practical completion because the intention is to occupy the property. The intention is critical. It will define the commercial attitude to the project from the beginning and for this reason lenders should acknowledge the difference.
Fortunately, there is a plethora of property financiers in the UK who can provide a solution for most problems and, in the right hands, there are means and ways to mitigate the risks concerning lenders.
Having the benefit of experience will make a difference to securing development funds. A comprehensive appraisal is necessary to ensure every possible funding route has been considered and explored. Practitioners would also do well to ensure they have full-unrestricted access to the entire lending market before they commit to a lender.
Of course, all lenders will have their specific lending criteria in place but solutions will be more forthcoming with those lenders, and particularly the people in their team, who are less process driven. Process lending usually works well where there is a high volume of transactions and cases can be easily pigeon holed. However, private healthcare development is a deviation from the norm and a more borrower focused attitude will help deliver results.
In summary, lenders are keen on the private healthcare sector because of the sectors track record. They understand private healthcare demand is traveling in one direction given population trends and the stresses on the NHS.
There is finance out there for healthcare development. The lending process should become easier as demand in the market grows and more projects are delivered raising confidence generally. In the meantime, the current funding difficulties can be managed successfully to secure finance for small to medium sized projects.