Development
Finance
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DEVELOPMENT FINANCE
HOW DOES DEVELOPMENT FINANCE WORK?
Development finance is a lending solution that enables investors to build, convert or refurbish properties. Short-term development finance can be used for commercial or residential buildings or as an option to purchase land to develop a new property.
Developers have traditionally struggled to secure finance due to barriers like a lack of collateral and development experience, their country of residence and the type of property they’re planning to purchase or build. But the market is evolving rapidly and new lenders are increasingly offering more flexible development finance mortgages, opening up new opportunities for ultra-high-net-worth individuals to address these traditional barriers.
Now, the most significant barrier to development finance is often the quality of the finance package you can negotiate. So it’s crucial to seek the expertise of an experienced negotiator like Hectocorn, who can help you secure a finance package that’s well-structured and tailored to your specific requirements.
HOW DOES PROPERTY DEVELOPMENT FINANCE WORK?
Development finance is typically structured as a short-term loan split into the site purchase and the project build.
Purchase finance: Covers the initial cost of purchasing a property or the site on which the property will be built. Lenders usually provide an advance covering a certain percentage of the price and the investor covers the rest, ensuring they have money at risk in the project.
Project finance: Covers the actual building process of a property. Lenders will typically advance the total amount for each stage of development. They will then certify and inspect the building work before enabling the investor to pay suppliers and move on to the next stage. This staged process ensures the investor has cash flow available to fund each step of the property development and limits risk for the lender.
The UK development finance market has a wide range of business models, from traditional banks to niche lenders like challenger banks, private banks and peer-to-peer lending platforms.
WHAT ARE MY PROPERTY DEVELOPMENT FINANCE OPTIONS?
Traditionally, the development finance market has seen interest rates ranging between 12% to 14%. But, as competition has increased with the rise of specialist development finance lenders, rates have fallen dramatically and property investors now have many options available. These options include mixing and matching various elements of finance, using short, medium or long-term financing solutions, and the ability to use different assets as collateral.
Development finance has historically been viewed as expensive but can offer lucrative long-term returns. For example, acquiring and developing a property can help investors massively increase its final value and unlock a range of refinancing options. Lenders are beginning to offer new possibilities like extended financial assistance, a form of short-term finance that assists investors with the control of completed developments. This 12- to 18-month solution ensures developers don’t have to sell off their assets to fund a project.
High-street banks still dominate the property development finance market, particularly when it comes to options like buy-to-let and refinancing. These high-street providers have started investing in specialist firms, enabling them to develop their influence in a flourishing market without hands-on involvement. It also allows them to offer developers short-term deals they would have previously have turned away. However, major lenders’ rigid deal structures and drawn-out negotiation periods mean their influence in development finance is being reduced.
As a result, we’re seeing niche lenders increasingly challenge traditional high-street lenders. These specialist lenders are quicker, more nimble, offer bespoke, cost-effective finance deals, and are typically more open to innovative structures. These lenders are ideal for developers looking to get quick deals over the line, with development finance options sometimes possible in as little as 48 hours.
This trend is set to continue as these specialist providers enable investors to negotiate more favourable development finance packages tailored to their specific requirements, as opposed to vanilla offerings from traditional lenders.
Another development finance option is Bridge Finance, a short-term financing solution that enables investors to “bridge the gap” between their available finances and outstanding debts. This option is typically used when an organisation has low cash flow but is guaranteed to receive funds later down the line. Upon the completion of a project, it’s refinanced against its enhanced value to raise funds to pay off the bridging debt at a reduced rate.
HOW STRONG IS THE UK DEVELOPMENT FINANCE MARKET?
The aftermath of Brexit and other economic challenges have affected the general UK property market. Yet the development finance market, especially in London, remains strong and demand continues from domestic and international investors. Furthermore, development finance firms are turning their attention to cities like Birmingham, Leeds and Liverpool, thanks to a greater focus on affordable housing and regulation changes that offer greater flexibility to housing associations.
The UK development finance market remains particularly strong due to the limited interest in development finance across Europe. That offers significant opportunities for developers in the UK and foreign-based investors to expand their portfolio reach.
The development finance market is rapidly evolving, but basic requirements remain critical to all lenders. They will review essential information like investors’ development experience, personal capital, gross development value (GDV), assets available for collateral, and the third-party contractors they intend to work with.
HOW CAN I SECURE DEVELOPMENT FINANCE?
As the development finance market diversifies, new options are increasingly available to property developers and ultra-high-net-worth individuals. Understanding these options is crucial before speaking to lenders to obtain a deal that best meets your specific financial situation and investment priorities.
Hectocorn has established relationships with lenders across the entire development finance market, from central banks to specialist niche providers. Our extensive network enables you to structure your financial package in the way that best suits your development mortgage requirements and offers the flexibility of options like remortgaging.
Our development finance expertise also unlocks financial flexibility that you’re unlikely to gain from speaking to high-street banks. For example, our relationships with niche lenders enable us to secure specialist products, bespoke structures and timescales, and competitive equity for ultra-high-net-worth individuals, regardless of whether you’re an established developer or approaching your first property project.
