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Development finance is a versatile financial resource used to generate capital for investors and developers – specifically to assist with any purchase and build costs related to residential or commercial development projects. But what does ‘good’ development finance look like and how can it help you achieve your project goals?
Finbri, a property development finance company, explains, “Despite the growing uncertainty in the property market, there has been a 6% increase of completed property development units compared to last year’s figures. There is a lack of new property supply in comparison to demand – providing property developers the opportunity to increase their property portfolio or enter this market for the first time.”
What is development finance?
Development finance is a short-term financing option that is often obtained for between three and twenty-four months and can be used to finance both the purchase of the site and the build costs. Heavy restorations and change-of-use conversions for residential, commercial, and mixed-use developments can also be financed through development finance.
Due to this sort of financing being disbursed in instalments as the development progresses, the developer only has to pay interest on the funds needed to advance the project to the next stage. The project’s value rises with each successive phase, ensuring that the loan-to-gross development value (LTGDV) ratio is kept within the loan’s parameters.
How is development finance most commonly used?
Ground-up property development. This is when a site is purchased with the intention of developing it into a new property or multiple properties. This can be anything from developing a single residential unit to a large-scale commercial complex.
Asset acquisition. This is when an existing property or many properties are purchased with the intention of carrying out refurbishment or redevelopment. The purpose of development finance can be used to acquire property or, in some cases, land.
Property renovation. This is when an existing property is purchased with the intention of improving the overall state of the property. This could involve anything from superficial cosmetic changes to a full structural renovation.
Property conversions. This is when a property is purchased with the intention of changing its use from one type to another. For example, converting an office block into residential flats.
Property refurbishment. This is when an existing property is purchased with the intention of carrying out refurbishments. This could involve anything from cosmetic changes to a full structural renovation.
What does ‘good’ development finance look like?
There are a number of factors that need to be considered when sourcing development finance, such as:
- Loan amount: The loan amount should be sufficient to cover the costs associated with the development project. It is important to remember that unexpected costs can always arise, so it is advisable to overestimate the amount required.
- Loan term: The loan term should be suitable for the particular development project. For example, a longer loan term may be required for a large-scale commercial development than for a small residential renovation. Typically, the loan terms offered range from 3 to 24 months.
- Interest rate: The interest rate should be competitive and in line with the current market rates. It is important to remember that development finance is a short-term loan and therefore the interest rate should not be too high.
- Associated fees: The fees charged by the lender should be reasonable and in line with the current market rates.
- LTV (loan-to-value): The LTV ratio is the amount of the loan in relation to the value of the property. The LTV ratio should be suitable for the particular development project. The typical loan amount offered is between 65% to 100% loan to gross development value (LTGDV).
“Good” development finance comes from a foundation of the lender understanding the development project, providing a tailored solution to meet the requirements and swift fund availability to receive the financing on time.
Where to obtain development finance?
Banks. Banks tend to avoid offering products in relation to development, in particular, to smaller developers with less experience. Whilst banks may be a viable source of development finance for larger developers with a proven track record, this is unlikely to be an option for many developers, especially those with less experience.
Specialist lenders. Specialist lenders can often lend up to 100% of the build costs and are more flexible than traditional funding sources. Securing funds for light or heavy refurbishments, conversions or ground-up development via a specialist lender is one of the most popular forms, as the developer can borrow large amounts and in stages as the build schedule progresses thus reducing the overall interest paid. BridgingLoan.org.uk is a UK directory that lists all major UK alternative brokers and lenders that arrange bridging finance and development finance.
Final thoughts
When making a decision pertaining to development finance the main attributes you need to consider includes the loan amount, loan term, interest rate, associated fees and LTV ratio. It is important to compare the different options and speak to a development finance specialist to minimise stress and find the best deal packaged to meet your specific requirements.
Good development finance will help ensure the continuation from stage to stage and the completion of your development project.
