Property Development Finance in the UK

Securing adequate funding continues to be one of the biggest challenges facing developers as they explore new projects across the UK. Typically, the biggest hurdle they’ll face is securing a well-structured finance package that meets their needs and aligns with their existing portfolio.

The success of every new building project hinges on the developer’s ability to navigate lender requirements and effectively assess market risks. It’s therefore vital for businesses to understand the challenges and opportunities, the nuances of the property market, and the finance options available to ensure they get the deals best suited to their requirements.

The State of the Market

The property development and finance sectors faced significant turbulence in 2023. House prices dropped by more than 1.8%, according to the Nationwide House Price Index, as a result of growing interest rates, inflation, and economic factors related to geopolitics and social shifts.

However, the UK residential real estate market is expected to expand at a compound annual growth rate (CAGR) of 5.75%, from $360.27 billion in 2024 to $476.46 billion by 2029. The UK real estate market should gradually emerge from the recession, with Halifax projecting an annual increase of 1.7%. The primary reason for this growth is expected to be the ever-increasing need for family homes, especially in urban regions and desirable sites.

Emerging Property Development Trends

Forecasting the property market’s path in 2024 may not be easy, but several tendencies have given us some indication of potential market trends. This includes the rise of new living spaces and increased demand for rental properties, which could present new opportunities for developers and investors.

New Living Spaces: Economic considerations have impacted buyer preferences, causing a shift towards more economical home options. For example, co-living and flexible spaces are becoming more popular in urban areas like London, Manchester, and Birmingham in response to changing consumer needs.

Buy-To-Let Opportunities: Demand for rental properties has increased due to the widening gap in housing affordability. Private rental prices in the UK experienced a significant increase of 6.2% in the year leading up to November 2023. The rise in rental prices varied across the UK, with England seeing a 6.1% increase, Wales a 7.3% increase, and Scotland a 6.2% increase over the same period. Within England, London recorded the highest annual increase in private rental prices at 6.9%, marking the highest rate since the London data series began in January 2006.

The Interest Rates Situation

Lenders set interest rates based on several variables, including the loan amount, your background, the site’s location, and the size of the loan in relation to the gross development value (GDV). After the surge in interest rates in 2022, Statista reported that in January 2024, the average 10-year fixed rate interest rate stood at 4.7%. This is still well below the ultra-low rates we have seen in the last several years.

The ongoing high interest rates have significantly impacted mortgage affordability, with approvals decreasing by 25% in 2023, according to Bank of England Data. However, mortgage experts are predicting the possibility of lower rates, with a slight decrease already evident in the first few months of 2024.

As affordability progressively improves, there may be increased activity in the mortgage market due to the expectation of more competitive rates in the coming months. For example, analysis by Quilter found that new homeowners’ monthly mortgage payments could decrease by 25% by the end of 2024. Therefore, people who purchase a property towards the end of the year would be in a better position than those who did so at the end of 2022. So it’s clear the UK property market is in flux, and it’s critical to keep an eye on these ongoing developments.

Financing Your Property Development In 2024

In a development financing transaction, a developer obtains funding from one or more lenders to buy land and develop property. After construction is complete, the property is sold or used as an investment that generates money. In this case, the developer’s rights and the property serve as collateral for the borrowed money.

Comprehensive ground-up development finance is required to cover the construction and acquisition costs of large projects. Usually, this funding is provided in installments over several months or years until the project is completed. Property development finance typically covers 70-80% of the overall construction cost, and equity or subordinated loans cover the remaining sum. There are several types of property finance available, including:

• Development Finance: Development finance serves the specific purpose of funding construction and development projects, offering capital for land acquisition, construction expenses, and related costs. It is accessible through banks, specialised lenders, and development finance institutions. Loan terms and interest rates fluctuate based on factors like project feasibility, the developer’s track record, and the collateral offered.

• Bridging Loans: Bridging finance provides developers with short-term options for quick access to funds. It acts as a link between buying land or property and obtaining long-term loans, such as refinancing or mortgages. Bridging loans are often favoured for time-sensitive projects because of their adaptability and quick approval times. However, they typically come with higher interest rates than traditional loans.

• Mezzanine Financing: Real estate developers frequently use mezzanine financing to close the difference between their equity contribution and the maximum amount of debt that traditional lenders are willing to provide. This can accomplish several goals, including lowering the required starting deposit, closing funding gaps, or obtaining extra money for a project. Mezzanine financing is often arranged as higher-interest second-charge debt.

Secure Your Development Finance With Hectocorn

Regardless of experience level, property development finance is a crucial yet complex component of each project. It’s vital to secure financing conditions that match your project needs, help you optimise returns, and reduce risks. And that means having a team of experts on board to navigate the process effectively.

Hectocorn’s established relationships with lenders across the development finance market enable us to secure deals you’re unlikely to find individually. Our teams can negotiate financing arrangements that best suit your existing portfolio and development requirements. Our expertise helps developers secure specialist products, bespoke deals and timescales, and competitive equity, whether they’re approaching their first project or expanding a portfolio.

Discover how we can achieve the best possible finances for your next development project by contacting us at [email protected].