How To Raise Development Finance
Development Finance is borrowing used to refurbish existing property or build from new. The demand for development finance is increasing, particularly in areas where house prices are already rising.
Back in 2014 Simon Rubinsohn, the chief economist for RICS said;
“..we desperately need more homes in areas where people want to buy and want to live. Until this happens we’re likely to see prices continue to increase..”
Since then little has changed and the demand for property continues to increase. This has lead to a direct increase in development finance and development lending as property investors seek to gain value from converting or making use of dated property.
Many people will see what is happening now as similar to the late 90’s/ early 00’s, but it the availability and access to funding is much tighter now than it was then.
The Development Finance Process
Unless you are developing large estates or undertaking major construction projects then you are unlikely to be a candidate for bank lending, it is just not their bag these days.
There are loads of development lenders out there, that is not the issue. The challenge is in knowing how they lend and how you can access this lending.
Most non-bank finance is based on set criteria. There is always movement on the criteria but the parameters need to be broadly met.
Typically when borrowing development finance you have a few options.
Borrow Only – This is where you can borrow for the purchase and borrow for the development with the finance being repaid from the sale. Typically interest is added to the loan and with the whole balance being repaid from sale or transfer to standard mortgage. As a guide you could borrow circa 50% of the purchase price and 100% of development costs up to a maximum of 70% of the total sale value (GDV – Gross Development Value).
The figures are just a guide, there is always movement which we can obtain for you.
Joint Venture – Some borrowers will advance above the percentages quoted and treat the development as a joint venture. In this scenario the property is usually registered to the lender with interest and a percentage of sale value being paid back.
A Joint Venture (JV) can be good where the developer has other projects ongoing or lacks the cash to put in at the outset.
Development Experience & Tracking
Lenders want experience. For many first time developers this shouldn’t be seen as a preventing barrier. Relevant experience needs to be shown even if this is the first development under your ownership. If experience is an issue then you need a contractor or architect on board to make sure the skills stack up.
The other key part is to plan your development clearly. For even a basic development having a schedule of works, costs and budgets is essential.
The bottom line is that the more you can back yourself up the better the deal you will get.
Every lender has a different way of doing things, they all approach interest, fees and costs differently. The best recommendation is if you are thinking about borrowing for a property development then get in touch and we can find the best lending solution for you.
If you want a simple way to get an outline of costs then use this spreadsheet (PROPERTY DEVELOPMENT COST ANALYSIS (1)) which allows you to model interest costs, terms and values.
For guidance on how to obtain the best development finance then get in touch. For any comments on this post please add them above.
By Dave Farmer