Development Finance


Unleashing the Potential

Embarking on property development in the UK, whether for resale, investment, or personal residence, can be a lucrative venture, propelling you up the property ladder or generating income. However, the cost of UK real estate development often poses a financial challenge, especially for those without immediate cash resources. Fortunately, the solution lies in development finance – a tailored financial instrument offering loans to cover land purchase, construction costs, and payments to professionals like builders and electricians. Don’t let financial constraints hinder your ambitions; explore the realm of development finance and kickstart your construction journey.

Understanding Development Finance

Development finance encompasses short-term loans designed to support residential or commercial development projects. Unlike conventional property mortgages, these loans have lifecycles ranging from 6 to 24 months. They cater to various development purposes, such as ground-up new builds, conversions, or refurbishments of existing properties.

Navigating the Process

Property development finance works by funding the costs associated with a development project, including land acquisition and construction expenses. Unlike standard mortgages for existing properties, these loans consider the anticipated future value of the property post-completion. Factors like Loan to Cost (LTC) and Loan to Gross Development Value (LTGDV), the borrower’s track record, and repayment capabilities are crucial in the assessment of loan applications.

With development loans, interest is typically capitalised or rolled-up, meaning it accumulates and is added to the loan balance rather than paid monthly. This approach eases cash flow during construction, with the total interest settled when properties are sold or refinanced.

Diverse Development Finance Types

Development finance solutions are diverse, and tailored for specific project needs. They can be utilised for:

  1. Residential Property Development
  2. Commercial/Semi-Commercial Property Development
  3. Renovations/Conversions/Refurbishments
  4. New Builds
  5. Single-Unit Developments Scaling to Large Multi-Unit Schemes
  6. Development Exit Funding

Specialized Categories

  • Regulated Development Finance: Governed by the Financial Conduct Authority (FCA) when over 40% of the development serves as the borrower’s residential dwelling.
  • Mezzanine Development Finance: Acts as a secondary line of borrowing, reducing the need for a substantial cash deposit.

For projects requiring a mix of loan products or uncertain financing needs, seeking professional advice is recommended.

The Development Finance Journey

A typical development finance deal involves several stages:

  1. Initial Enquiry: Seek free advice and submit a formal application when ready.
  2. Agreement in Principle: Lender provides indicative terms and conditions.
  3. Due Diligence: Lender assesses project feasibility, including site visits and valuations.
  4. Formal Loan Offer: Lender extends a formal offer, accepted by the borrower.
  5. Documentation and Contract Exchange: Lawyers create and parties sign necessary documents.
  6. Completion: Initial drawdown for land purchase or construction initiation.
  7. Progressive Drawdowns: Additional funds released for construction stages.
  8. Loan Repayment: Typically upon property sale or refinancing.

Lenders may request comprehensive documentation emphasizing planning permissions, project cost breakdown, the borrower’s development experience, and proposed exit strategies.

How much I can Borrow

Development loans start from £200,000, with varying upper limits depending on the lender, reaching up to £50 million.

Interest Rates

Interest rates fluctuate between 7% and 15% APR. However, the focus for borrowers should extend beyond interest rates to encompass total deal costs, fees, and loan covenants.

Associated Costs

Development finance entails various fees:

  • Lender Arrangement Fee
  • Broker Arrangement Fee
  • Monitoring Surveyor Fees
  • Exit Fees
  • Legal Fees
  • Non-Utilisation Fees
  • Management/Admin Fees

Real-Life Example

Illustrating a new-build development finance scenario:

  • Land Purchase: £600,000
  • Build Costs: £2,000,000
  • Total Deal Costs: £2,600,000 (excluding fees and interest)
  • Gross Development Value (GDV): £3,500,000

In this case, development finance covers 70% of land cost (£420,000) and 90% of build cost (£1,800,000), resulting in a loan facility of £2,220,000.

Exploring 100% Development Finance

While typical UK property development finance caps at 60-80% of total deal value, 100% financing may be possible through joint ventures or additional collateral offerings.

Vital Considerations for Developers

Planning Permission

Full planning permission is crucial before obtaining finance, ensuring lenders’ confidence in project viability.

First-Time Developers

Even with minimal experience, funding options exist. Seeking advice from commercial finance managers is advisable.

Bad Credit Funding

Options are available for borrowers with bad or no credit. Confidential discussions can explore tailored funding solutions.

Bridging Finance Insight

Bridging finance, a short-term solution, covers timing gaps in property-related transactions during real estate development.

Commercial vs. Residential Development Finance

Distinguishing features between commercial and residential development finance:

Loan FeatureCommercial LoanResidential Loan

Purpose of Loan Business or large-scale residential property development Residential property development (single or few units)

Maximum Loan Value Up to 70% of land and build costs Up to 70% of land and 90% of build costs

Term of Loan Until development completion (6-24 months) Until development completion (6-24 months)

Interest Rate 4% to 15% APR 4% to 15% APR

Regulation Unregulated May be regulated (FCA governed) if over 40% for dwelling

Exit Strategy Sale or refinance with a long-term mortgage Sale or refinance with a long-term mortgage

Joint Venture Development Finance

Joint ventures involve partnerships with financiers funding up to 100% of the total deal value, sharing profits upon property sale.

Decoding Development Exit Finance

A form of bridging loan, development exit finance bridges the gap post-completion until property sale or long-term mortgage, providing a cost-effective solution.

Diverse Lending Landscape

Development finance is accessible from various lenders, including major banks, investment companies, and specialist property lenders. The key lies in identifying lenders aligned with project needs and securing optimal loan terms.

Repayment Strategies

Repaying a development loan involves options like using sale proceeds, refinancing with a long-term loan, or opting for development exit bridging loans with lower interest rates.

Application Tips for Success

Before applying for funding, developers, both seasoned and novices, should consider critical aspects:

  • Thoroughly assess the property and its marketability.
  • Stick to budgetary constraints.
  • Vet architects and contractors meticulously.
  • Incorporate contingencies for unforeseen challenges.
  • Gauge projected profits and