What is Property Development Finance?
Investing in the property development market can be a great way to generate income by reselling or retaining the property. However, the UK real estate market is quite expensive and many potential property investors and developers lack sufficient funds for the investment. The good news is now you can access development finance to purchase the land and undertake development projects smoothly.
What Does Development Finance Mean?
Development finance in London is a popular form of financing in the UK that is particularly used to fund property construction, refurbishment and conversion projects. While the initial amount is used to purchase the land, the remaining amount is released in stages to cover the construction costs.
Unlike long-term mortgages, development finance usually lasts for a short term, ranging from six to twenty four months. Whether you are a property investor or developer, you can use development finance to undertake residential, commercial, industrial and infrastructure projects.
How Does Development Finance Work?
Development finance is taken to build a new or renovate an existing property. Since the property doesn’t exist yet, or its current condition is going to change after renovation, development finance is granted based on the current development cost as well as the projected value of the property once it is completed. Alongside, the borrower’s credit history and their ability to repay the loan are also considered during the loan application.
In a development finance application, the interest is either rolled up or retained. That means the interest rate charged by the lender is added to the final amount rather than being paid monthly. This prevents cash flow disruption during the construction period, and the total interest amount is paid when the property is sold or refinanced to a long-term mortgage.
Key Aspects of Development Finance
Loan types
Development finance is classified into two major types: ground-up development and heavy renovation or conversion. The lender may provide capital to purchase the land and release other amounts in stages based on the progress of the construction or renovation project.
Interest rates
The interest rates in development finance are quite higher compared to traditional mortgages. However, the developer’s experience, current economic conditions and LTV value also influence the rate.
Loan term
Development finance is a short-term loan that usually lasts a few months. This is because the developers plan to repay the loan by selling or refinancing of the completed project.
Loan-to-value (LTV)
Loan-to-value represents the loan amount against the appraised value of the finished property. The maximum LTV ratio varies from lender to lender as well as the feasibility of the project and perceived risks.
Gross Development Value (GDV)
GDV represents the estimated value of the property after completion. Higher GDV represents a potentially profitable project if everything works out as planned.
Due diligence
Before granting the loan, the lenders conduct strict due diligence to evaluate the feasibility of the project, the property’s worth, the developer’s experience and their exit strategy.
Exit strategy
How you plan to repay the loan plays an important role in influencing the lender’s decision to provide the loan. Developers are expected to present a clear strategy to repay the loan, either through the sale of the property or refinancing it with a long-term mortgage.
Costs Involved with Development Finance
Besides interest rates, development finance comes with various costs that you need to be aware of.
Arrangement fee – Charged by the lender for arranging and setting up development finance.
Valuation fee – A valuation fee is paid for hiring a surveyor to evaluate the estimated value of the project upon completion.
Broker fee – If you are using a broker to access development finance, this will incur a fee.
Monitoring fees – The lender will charge monitoring fees to monitor the progress of the development project.
Professional fees – Professional fees are paid to professionals, such as architects, lawyers and project managers involved with the project.
Exit fees – A fee is paid when the loan term ends and the development loan is repaid.
Development Finance Application Process Explained
#1 Initial consultation – The development loan application begins with an initial consultation with the lender to discuss project requirements and financial needs.
#2 Feasibility assessment – The lenders will conduct the feasibility assessment to evaluate the project’s viability as well as the developer’s experience and track record.
#3 Application submission – The developer will now submit the application that includes the detailed business plan, project budget and timeline, planning permissions, company background and other information required by the lender.
#4 Due diligence – The lender will carry out due diligence on the proposed development project to evaluate its potential, ensuring every detail mentioned in the application is accurate and complete.
#5 Formal loan offer – Once the due diligence is over, the lender will extend a formal loan offer, detailing the terms and conditions, the interest rates, loan duration, fees and other critical information.
#6 Release of funds – After you accept the loan offer, the deal will be finalised and the funds will be released in stages. Before each drawdown, the lender may inspect the progress of the project.
Benefits of Development Finance
Development finance can be extremely useful in bridging financial gaps during the property development project until a permanent solution is achieved.
Fast access to funds – Development finance can be accessed quickly with funds being available in as little as a few days.
Access to a large sum of money – With development finance, developers can raise a large sum of money, allowing them to undertake large-scale projects that might seem unattainable otherwise.
Flexible repayment terms – Borrowers can create a repayment plan that aligns with their cash flow and project timelines, leading to better financial management.
Support diverse projects – Development finance can be utilised for a range of projects, such as residential, commercial and mixed-use properties, enabling developers to expand their portfolio.
Are You Looking for Development Finance? Development finance is a crucial and complex aspect of the real estate industry. It encourages property developers and investors to transform their goals into tangible results. If you are looking for a development finance loan in the UK, Bridging Finance is here to offer assistance in finding the right lender for your circumstances. We have years of experience in the development finance industry, meaning we can help you connect with suitable lenders who offer favourable terms to meet your specific requirements.