Welcome to Assetz Capital’s guide to property development finance! Whether you’re a seasoned property developer or just starting out, understanding how development finance works is essential for the success of your projects. In this blog, we’ll explore the key features of development funding, the main uses of finance for property developers, and the benefits of using a specialist finance broker to find the best deals. So, let’s dive in and demystify the world of development finance!
How Does Property Development Finance Work?
Property development finance is the lifeblood of any development project. It involves borrowing money specifically for the purchase of land or sites and the construction of new residential, commercial, or mixed-use buildings. Unlike traditional homeowner mortgages that can span over decades, development finance is short-term and typically repaid within 9 to 36 months, depending on the completion of the building.
To determine how much a developer can borrow, several key figures come into play. These include the gross development value (GDV), projected build costs, equity contribution, and day one land leverage. Lenders assess the site and building plans through professional valuation reports and calculate loan to gross development value (LTGDV) and loan to cost (LTC) ratios to determine their lending limits. It’s important to note that criteria and lending parameters may vary among different lenders offering property development finance in the UK. Repayment of development loans usually occurs when the newly developed properties are sold or refinanced longer-term. Financing can be arranged through either banks or non-bank lenders.
Key Features of Development Funding
Development funding has several consistent features that allow developers to make realistic financial projections. Understanding these key features is crucial for planning your project effectively. Here are the main aspects to consider:
Short-term duration: Development finance typically spans between 9 and 36 months, providing developers with the necessary funds during the construction phase.
Loan coverage: Lenders can lend between 55% and 95% of the site costs, including lending costs. The initial funds cover both lending and build costs, with the remaining loan balance allocated toward land costs.
Higher interest rates: Compared to traditional long-term financing, development finance generally carries higher interest rates. This reflects the short-term nature of the loans and the associated risks involved in property development.
Layered funding: Development finance is often provided in stages, allowing developers to access funds at different points in the project timeline. This ensures that financing is aligned with the progress of construction and mitigates the risk for both lenders and developers.
Main Uses of Development Finance
Property development encompasses various avenues, and development finance serves specific purposes within this realm. Here are the main uses of development finance:
Residential development: Development finance is used for the purchase of land or properties intended for residential use. It includes ground-up construction as well as conversions of existing commercial buildings into residential spaces. Detailed planning permission or permitted development rights are essential for securing development finance for residential projects.
Commercial development: Commercial development finance is specifically designed for developing commercial properties. Lenders often require pre-let or pre-sale agreements to ensure the viability of the project. In mixed-use developments, lenders may have limits on the acceptable percentage of the overall scheme allocated to commercial space.
Ground-up construction: Development finance is particularly suitable for large-scale ground-up construction projects with significant budgets. It provides the necessary funds to cover the construction costs and allows developers to focus on bringing their vision to life.
Buy-to-let and buy-to-sell: Within the umbrella of development finance, options such as buy-to-let and buy-to-sell allow developers to invest in properties for the purpose of generating profit. These financing options cater to developers looking to capitalise on the rental market or the opportunity for a profitable sale.
Bridging loans: Bridging loans serve as a form of short-term development finance used in specific scenarios. They are often employed to purchase auction properties, properties that don’t meet traditional mortgage criteria, or properties that require refurbishment before obtaining detailed planning permission. Bridging loans provide developers with the flexibility to secure properties or land quickly, allowing them to move forward with their plans.
Using a Assetz Capital for Development Finance
Property developers should seriously consider using Assetz Capital for their development finance due to a multitude of compelling reasons.
Firstly, Assetz Capital offers flexible and tailored financial solutions specifically designed for the unique needs of property developers. With their extensive experience in the industry, they understand the challenges faced by developers and provide customised funding options to suit individual projects.
Secondly, Assetz Capital boasts a strong track record of successful funding. Having funded around 1 in every 12 new homes built by SME housebuilders in the last couple of years and supported funded the building of over 7,000 new homes. Their reputation for delivering reliable and efficient financial solutions instils confidence in developers, assuring them of a dependable partner throughout the entire project lifecycle.
Additionally, Assetz Capital’s application and approval process is streamlined and efficient, enabling developers to access funds quickly and seamlessly. Their commitment to prompt decision-making and responsive communication ensures that developers can move forward with their projects without unnecessary delays.
Moreover, Assetz Capital offers competitive interest rates and flexible repayment terms, enabling developers to optimise their financial planning and maximize returns on their investments. Finally, their dedicated team of experts provides comprehensive support and guidance, from initial application to project completion, offering invaluable industry insights and expertise.
By choosing Assetz Capital for their development finance, property developers can benefit from a trusted partner who understands their needs, delivers efficient funding solutions, and supports their success throughout the entire development process.