Like with many other sectors, the property market took a hit from the pandemic. Housing sales volumes plummeted due to the pandemic. What’s more, the long hiatus of the property market during lockdown has also altered the buyer preferences in terms of location and size.
More than ever, developers need easy access to sustainable financing to catch up with the market demands and aid the turnaround. As a mainstay in property financing conversations, development finance continues to be a significant requirement for the future of UK house building. This article delves into development finance and what it takes to ensure you’re successful in obtaining the funding you require.
What is Development Finance?
Property developers face numerous problems, from unpredictable weather conditions delaying projects to material supply issues due to the global supply chain damage caused by COVID-19. Its clear the problems facing developers don’t always necessarily stem from poor planning or management decisions.
Take the weather example, for instance. It’s an issue developers have very little control over. Yet, its impact can result in project cost increases. However, developers will do anything to ensure issues over which they have greater control neither delay progress or increase their debts. Applying for a property development loan or development finance has provided a helpful way to realise this goal. But what is development finance?
Development finance is a short-term financial instrument offered to property investors, builders and developers with extensive experience in developing land and a proven track record of paying back associated loans. It can serve as a quick way to raise more capital, procure materials and settle fees.
Development finance differs from traditional loans and mortgages in various ways. Mortgage lenders focus on a property’s value in its current state, while development finance lenders consider the potential value of a project after completion, which is known as the Gross Development Value or GDV. Mortgages are paid out in a single lump sum to purchase a property whereas development finance is paid out in tranches in line with the project’s build schedule. This affords developers working with development finance a better way to reduce the associated interest charges as they will only draw the funds in segments to move the project along. This means they’re not paying interest on the whole agreed facility from day one.
When Should You Take Development Finance?
The standout features of development finance are:
- It’s short-term financing nature – Often, the duration doesn’t exceed 24 months.
- It’s paid out in tranches – It will be aligned with your build schedule so an accurate build schedule is essential.
- 70% LTGDV is available – The loan-to-gross-development-value is likely to be up to 70%
- 65% LTV of the purchase price is available – The loan-to-value of the property price is up to 65%.
- 100% Funding might be available – If you have more security than just the single project, 100% finding could be available with additional security.
- Joint venture finance might be available – Depending on the type of project some lenders may be able to offer JV financing, effectively taking an equity stake in the project to fund it.
How Can I Increase My Chances Of Obtaining Development Finance?
It pays to be well prepared. Ensuring you have all the correct paperwork in place that will support your application process means you’re more likely to be successful.
If you’re an experienced developer this should come as second nature to you but if you’re a first timer then here’s a list of the information you’ll need.
In terms of the information that you should expect to provide to a lender when applying for a development finance loan, you will require the following:
- Details of the site or property:
- Its purchase price including all associated documentation
- Its open market value determined by a RICS valuer
- Full address
- Development costs
- A detailed breakdown of all project costs
- A complete schedule of works for the project
- Development appraisal
- Planning application/permission details
- What you intend to build
- Current planning permission
- Site plans, drawings & elevation details
- Planning permission applications and documentation
- Gross Development Value details:
- Evidence of the expected end value
- Applicant details:
- If you’re a limited company then the director’s details will also be required. This includes the history of previous developments carried out, how successful they were, their CVs, and project profits from previous developments.
- Who the main contractor will be
- Name, address and contact details of the contractors
- Previous experience of completing similar projects
- Project manager’s contact details and their CV experience
- Company structure
- A completed Asset, Liability, Income and Expenditure Summary (ALIE) for the company directors or applicants involved
- A planned exit strategy for the project
In short, property development can be capital intensive but there are plenty of funders out there ready and willing to help you realise your profits. However, you have to position yourself and your project in the best light. If you’re less experienced you may benefit from speaking with a property development finance broker, such as those listed on bridgingloan.org.uk, who can help you package up your application in a way that makes it easy for a lender to say ‘yes’.