Banking 101 -
Property Development Funding 101: Financing a Development Project
From purpose-built student accommodation to office space, ground-up residential property to build-to-rent, 'development finance' covers many projects.
From purpose-built student accommodation to office space, ground-up residential property to build-to-rent, 'development finance' covers many projects. Factors such as scale, timeline and budget will influence how finance for property development is structured.
Different lenders will take different approaches to funding, after assessing various aspects of the project, including the build type, valuations and developer history.
Sustainability (environmental, social, governance) is increasingly a key focus for all professionals involved in development funding, with a requirement to meet this expectation balanced with maximising value.
You will also need to consider future legislation, such as the proposed increased requirement for Energy Performance Certificates and if you are building this into your proposal.
How do property developers fund projects Acquiring funding for property development
There are several types of building development loans available to property firms. The type of loan that is best for you will depend on the kind of development you're planning and how extensive the development will be.
Property funding development for individuals
For individuals, the proposed property development is likely to be related to your primary residence, or part of a small property portfolio. The most likely route to funding is through a regulated mortgage*. The amount you can borrow is dependent on the loan to value (LTV) ratio of your current mortgage/s. Some providers will also consider any expected increase in value as part of the underwriting process.
How to get funding for your property development: first-time property finance applicants
- Determine which type of finance option is most relevant to your needs before you apply.
- Consider the type of property (e.g., commercial or residential) and the scale of the development.
- Consider the timeline of the development project.
- Do your research into the property market of the area where you're looking to buy.
- Work out what you can afford to spend – it will cost more than you think!
Property funding development for smaller business
If you have a commercial mortgage already, you may be able to secure additional funding for development work, but this will again be contingent upon LTV as well as your track record and experience.
Bridging loans are a shorter-term option if the proposed work is considered to be fairly 'light', but – depending on the appetite of your lender – development finance may be the way forward for more significant projects. To secure this, you will need a clearly defined development programme and budget, as well as a strong idea of the market you are operating in, potential future income/value, and an understanding of whether you intend to retain the development or sell it.
Rising construction costs and a shortage of labour are current issues facing construction. Lenders will look to ensure that there is an appropriate level of cost contingency in your budget and that you have sufficient equity to meet any cost overruns.
Many contractors working with very small profit margins on contracts and revisions under the building contract may increase costs. Contractors may also have several projects underway, and you will need to satisfy yourself (and the lender) that the contractor is sufficiently strong financially and in terms of resource to manage all.
Property development funding for investors
Larger organisations tend to have the expertise and track record required to secure large development loans for multi-million-pound projects. These funding structures can be bespoke, depending on the developer's requirements; flexible credit facilities are one example of how funding can give developers flexibility when unforeseen challenges arise during a project.
Build to rent versus build to sell
An important question for investors is whether they are building to rent or to sell their development. 'Build to sell' deals are contingent upon conditions within the UK property market. Build to sell loans, with their increased risk, come with specific regulatory requirements upon banks, requiring more capital usage, which can make securing a competitive interest rate more of a challenge.
Build to rent projects are more of a longer-term investment where valuers look at rental income over time, rather than capital appreciation or depreciation of bricks and mortar. These slightly lower-risk investments can be a way of securing a more competitive interest rate.
Property finance is a complex and costly undertaking, and working with the right lender can make the process significantly more manageable.
Arbuthnot Latham works with our clients to understand their aspirations and goals to provide the support that works for them
Contact a financing specialist to talk about the best options for funding your next development project.
* Your property may be repossessed if you do not keep up repayments on your mortgage.
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