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How to Obtain Development Finance for a New Build Development Finance Property Development

In order to accommodate London’s growing population, many developers are focusing on new builds. London Data Store took apart the London Housing Market Report from May 2020 that states that 42,630 new home EPCs were registered in London in 2019/20. 

This increased demand for housing is evident in London’s rapidly growing population. The World Population Review has reviewed the UN World Urbanization Prospects report and concluded that the population is currently estimated at 9.3million, this is estimated to reach 10.23 million by 2030. Since just 2015, London has grown in population by around 642, 635. 

Due to the rising population, the need for property developers is high, meaning that the request for finance is also high.

However, gaining access to finance can be the biggest challenge for property developers. Here are some tips to help you with the finance opportunities/options available to you for your new build project:

CONTENTS

What is a New Build Property

A new build is the construction of a new building such as a house, apartments, office blocks or any building that is newly developed. Even an extension of a structure can be classed as a new build but the existing part would not be included in this class.

Finance Available for New Build Developments

How to Obtain Development Finance for a New Build Development Finance Property Development

Mezzanine Development Finance Explained

Mezzanine development finance allows the developer to put less of a cash investment into the project, and it comes with tax-deductible interest. It can give you a more desirable loan-to-value (LTV) ratio.

However, it is more expensive and can mean that your lender will receive more control over the project. 

Learn more about Mezzanine Finance.

Development Finance Explained

Development finance can be used for financing build costs/development, and to cover the cost of land. 

Development finance is often set aside for developers with a certain amount of experience due to lenders wanting to see that you’re trustworthy by examining a successful history with property development. If lenders do see you as credible, then you may be able to secure up to 100% development finance.

For this to work to your advantage, you should restrict development finance facilities to 60% of the land cost and 100% of the build cost.

Some lenders may even be willing to provide the entire cost of the development of a property, freeing up the rest of your capital for another new build or also to invest in a different development.

However, it is unlikely to receive 100% development finance if you are a new developer or have never built a new build before.

Lenders often seek for developers to have experience when giving out development finance because:

They can see their track record.

Experienced developers have likely already made their mistakes and learned from them.

Experienced developers are less of a financial risk than non-experienced developers.

Due to this bias, it can make receiving development finance difficult for those who are first-time developers.

Learn more about development finance here.

A Bridging Loan

This is short-term finance and is available for developers. To learn more on bridging loans click here.

Key Features:

  • 3 to 12 months
  • Need security
  • Fast access to Money
  • Borrow up to 80% LTV
  • With more security 100% LTC

Lack of Experience

Not all first-time developers are grouped into the category of being inexperienced in lenders standards. Some first-time developers have experience in commercial or residential property and know their way around loans and lenders. This experience can also work in their favour when it comes to lenders giving out development finance.

Seek for the Correct Lenders

Sometimes the types of places you are trying to buy will affect whether lenders are willing to invest in your project. Most lenders will avoid situations that:

• Are derelict 

• Have structural issues

• Are without a functioning bathroom

For projects with the above issues, you will need to contact a specialist lender to seek finance.

Typically, high-street lenders are stricter about who they will offer their finances to. 

Specialist lenders, on the other hand, are more willing to lend finances to developers with not as much experience, including for first-time developments as long as they have a sufficient plan.

You should always make sure that you know about the different types of lenders and do not let lenders meddle too much in your plan. 

High-street lenders are known to try and change what you have planned by doing things their way. You need to stand your ground and keep control of the project.

Conventional lenders will only release funds in stages and often partake in some site inspections before providing any finance. However, they can also sometimes hold off on giving you the money until you complete a required piece of work. 

Try to find a lender who works flexibly and trusts that you know what you are doing without trying to meddle.

The Importance of Planning

Be knowledgeable and prepared. Often developers with little experience do not accurately predict costs for things such as:

• Legal and administrative help

• Planning application

• Forget to take into account the possibility of delays and other unforeseen events such as illnesses, weather delays, and material delivery delays etc.

• Project management

• Marketing and selling transactions

It is always a good idea to contact lenders once you have a structured plan with a builder and architect on board. This will help to gain the lender’s trust and demonstrates that you are investable by providing a carefully planned structure of the project to invest in.

To create a carefully constructed plan, you can get your application ‘packaged’ by an experienced broker. 

Your plan must also portray that you clearly understand the costs involved in your development idea, and that you understand cost control and how to manage your finances effectively. 

A ‘Packaged’ Application Explained

An experienced broker can ‘package’ your application to ensure that you know what you are doing and that the development is planned to a professional and detailed standard to which the lender will expect. 

A ‘packaged’ application is primarily a business plan diary, that will detail the steps of your development in extensive detail. It will contain information such as:

• the purchase of the land or building

• Detail the build costs

• Detail the costs to finance, insurance, marketing, architects, and professional fees

• It will also detail any potential legal issues that may arise and the plan to avoid or solve them

• It will take into account possible barriers and problems that may present themselves within the project such as illnesses or late deliveries of materials and how this may affect funding costs

• A detailed exit plan

A ‘packaged’ application shows to the lender that you have planned efficiently and entirely for any barrier that may stand in your way. It presents your project as being well thought out investable if you provide as much information and possibilities that may arise as you can. Lenders do not appreciate over-confidence; it is wise, to be honest about any problems that your development may run into and provide options for solving that problem or avoiding it. 

Experienced brokers will be able to help you along the way and provide all of the help that you may need in creating a business plan that is fit for a lender and transform your investability. 

If you require development finance and it is your first new build, you should contact a property specialist finance broker for some help and advice. The financial services industry is complex and can be challenging to understand; your best bet is to contact a property specialist finance broker who can provide you with their knowledge and contacts to find the best option/s for your new build project.

The Benefit of a Joint venture partner (JV)

How to Obtain Development Finance for a New Build Development Finance Property Development

Keep in mind that most joint venture partners will share the profit of the development.

Joint venture partners may also be able to secure a development finance loan for the project due to them having more experience and more investability.

Lenders may also provide development finance to you if you are working with an experienced developer, as they will know that your partner knows what they are doing and therefore automatically makes you more investable. 

Seeking a joint venture partner for your first development project is an excellent way to increase your investability to lenders, and also a good idea to gain experience. 

References:

London Datastore, London Housing Market Report, May 2020, London Datastore, https://data.london.gov.uk/housing/housing-market-report/

World Population Review, London Population 2020, 2020, UN World Urbanization Prospects, https://worldpopulationreview.com/world-cities/london-population/

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