Development finance is the funding of property development projects and typically refers to medium to large-scale, residential & commercial property development.
Projects that require development finance are usually too complex or too risky for traditional funding sources like banks. Instead, they must seek out specialist lenders who are willing to provide the bespoke levels of capital required.
Development finance can be used to fund a wide variety of projects, including office developments, retail parks, warehouses, and residential developments.
Securing development finance is usually more complex than traditional mortgage lending, due to the complex nature and the sums of money needed to complete the project.
The Money Hub are property finance specialists, helping clients connect with lenders to find the best possible finance solutions. Property Development finance is one of our specialist areas, and we are pleased to say we have helped many individuals, groups, developers and investors finalise their plans and connect with lenders willing to assist and support them.
How lenders underwrite property development finance can be split into 4 keys areas – Capability, Character, Security and Funding. This development finance guide helps you to understand these areas and provides you with everything you need to know from planning to realising your property development dreams.
What is the Capability of the Applicant?
No two investment plans are the same for many reasons, but the unique experiences and circumstances of the property developer are significant factors in your ability to arrange funding. To enhance your chances of success, showcase your expertise, credentials and suitability for development projects.
Can a developer showcase experience in investment projects?
A good CV tells you a lot about the skills and expertise a partner is likely to bring to an investment project and whether they will be a good fit for you and your needs.
Things that are helpful for an applicant to share include:
Whether they had to borrow money in the past
Details of the deal
The outcome of the investment
If they lacked experience, did they work with key contractors and consultants to complete the project on time and budget?
What are the red flags for a lender when assessing an applicant for property development finance?
There are certain things that may make a lender reconsider their decision to offer you finance. You should avoid:
Making unrealistic promises about the end value of the project
Asking for too much money
Failing to provide a detailed and well-thought-out investment plan
Do you already own property?
A client who doesn’t own property personally and wants to enter development finance is taking considerable steps. The majority of lenders will have concerns over this form of applicant, and will look upon their application less favourably.
This isn’t to say property owners are accepted with no scrutiny, but amidst the many features considered in the process, this is an issue which will arise.
Existing landlords offer confidence to a lender, and from a personal level, this is something we recognise as standard in the industry. We have experienced many landlords keen to expand their portfolios, moving from letting a single property to managing an investment portfolio.
If you own property, what type of property?
While owning any form of property is a great starting point for obtaining development finance, it is fair to say lenders welcome applicants with specific property ownership linked to the development they are looking to pursue, for example if you already own commercial property this would help with development finance on commercial properties. In assessing risk, knowing someone is a commercial landlord, or at least has experience in managing commercial premises such as offices or pubs is a positive factor in an application, but not essential.
Can the applicant rely on help from external parties?
No one is expected to do all the work themselves; the more experts and trusted professionals around you, the more receptive a lender is likely to be to an applicant. If you can show a good working relationship, or the ability to call on trusted professionals, you showcase yourself in a better light. Key professionals, you should work with include:
Solicitors and legal representatives
Who will manage the work?
Will you manage the work yourself or appoint a third-party project manager? Lenders understand both scenarios, and each has its own benefits and drawbacks.
Self-managing is often looked on more favourably as it shows initiative, commitment and an understanding of what is required to complete a development project providing you have the right experience. If you are planning to appoint a project manager, make sure you have done your research and are comfortable with their experience and ability.
Does the applicant have experience in planning applications?
The planning process is a minefield, and while some lenders are happy to lend to applicants without experience, many prefer at least some understanding of the process and that they have an experienced architect/builder in place.
If you have been through the process before, this is extremely helpful in securing property development finance as it gives lenders greater confidence that you know what you’re doing.
The Applicant’s Character is a Massive Factor
A lot of factors go into getting development finance, but one of the most important is the applicant’s character.
The first is employment status. Lenders want to see that the applicant has a steady income and a good track record. They also ideally want to see a strong credit profile. This means they’re looking at how the applicant has previously managed credit.
Lenders are looking for applicants who have demonstrated strong financial management skills in the past. They want to see that the applicant has a history of making timely payments and managing their debt responsibly. The better applicants’ credit history, the more likely they are to get approved for financing.
Some lenders can help people with issues
There are lenders who can help people with issues in their credit history, but they will often require a larger deposit and may be charged a higher interest rate. So, if you’re considering applying for development finance, ensure you’ve got your finances in order first.
Security – Types of Property You Can Buy
When it comes to property development finance, the type of property/land you’re planning to buy, its location, development plans, suitability and its use – commercial or residential all have an impact in a lenders decision.
Investment for Land or Property?
The first thing you need to consider when taking out a property development loan is whether you’re investing in land or property. If you’re buying land, it’s essential to remember that the demand for land can vary greatly depending on the location. For example, rural land may not be in as high demand as land in an urban area. This can affect how easy it is to sell the land in the future and how much profit you can make from it.
On the other hand, if you’re buying property, there are a few things you need to consider. First, you need to consider whether the property will be used for commercial or residential purposes. Each property type carries different risks and rewards, so it’s essential to do your research before deciding.
Commercial properties may take longer to sell and also come with a higher risk of vacancy, but higher risk may bring stronger returns. On the other hand, residential properties may be easier to sell with a lower vacancy risk. You’ll also need to consider whether a change of use is required for the property where converting from commercial to residential use. A change of use can add value to a property, but it can also be a lengthy and expensive process.
When taking out a property development loan, it’s important to consider the type of property you’re buying and what you plan to do with it. The location of the property, along with whether it’s being purchased for commercial or residential use, can affect both the risks and rewards associated with the investment. By considering all of these factors, you’ll be able to make the best decision for your needs.
Your Funding Goals
When it comes to property development, one of the most critical aspects is securing the necessary funding.
Property Development finance is a type of short-term loan used to fund the purchase, refurbishment, or
construction of a property. This type of loan is typically repaid once the development project has been completed and the property has been sold or rented out.
When taking out a loan for your property development, it’s essential to consider how much you will need to borrow and over what period of time. You’ll also need to consider your deposit, as well as the final value (GDV) of the property once the development is complete. It’s also worth considering whether you will sell or refinance the property once the development is finished to repay the loan.
Lenders will request the schedule of works document which will detail the full breakdown of the works required on the project.
With all the information your broker & lender may be able to provide several different options available for funding your property development.
What is the end goal for the property development?
The end goal for the property development will ultimately dictate how the funding is repaid. For example, if the aim of the development is to sell the property once it’s complete, then the loan will need to be repaid in full upon completion of the sale. However, suppose the development is for personal use or for rental purposes. In that case, there may be the option to refinance the loan and spread the repayments over a more extended period with a more traditional mortgage.
It’s important to consider the end goal for your property development before taking out a loan, as this will affect how the loan is repaid. If you’re unsure about what you want to do with the property once it’s finished, then it’s worth speaking to a financial advisor who can help you make the best decision for your needs.
What are the Risks and Rewards Associated with Taking out Development Finance?
Taking out development finance can be a risky investment, but it can also offer high rewards. The main risk associated with this type of loan is that the property may not be completed on time or to the required standard. This could lead to delays in repayment, or even a complete loss of the investment.
However, if the development is completed successfully, then the rewards can be significant. Not only will you have made a profit from the sale of the property, but you will also have increased the value of the land on which the property is built. This can offer a significant return on investment, and is one of the main reasons why people choose to take out property development finance.
Every project is unique
It would be fantastic if you could follow a template or step-by-step guide to arrange property development finance and bring a development plan to fruition. Sadly, this isn’t the case. The huge number of variables involved with each process means every project is unique, and must be tackled on its individual merits.
This is why it is best to work with professionals who are skilled in this line of work, and have adapted to many situations. Rather than finding a professional who works in a set way, it is far better to find a specialist who knows the industry so well that they can alter their working practice to support you, no matter the challenges you face.
This is something we pride ourselves on at The Money Hub, and we believe it is why finding the right external partner’s is crucial. Given the range of issues impacting on these projects, it is unlikely one single person or firm has everything you need. Surrounding yourself with a team of experts ensures you receive the best support, and this enhances your chances of success.
Key Role Specialists Can Play to Secure the Right Finance
The process of applying for development finance can be complex and time-consuming. It’s important to have a clear understanding of the process and what’s required before you begin.
Your broker will be able to guide you through the process and help you secure the right finance for your project. They will also be able to provide advice on the best way to structure your loan and how to make the most of the available funds. When it comes to property development finance, your broker is your best chance of securing the right loan for your project. They will be able to guide you through the process and help you secure the necessary funds.
If you work with an architect, they will understand the planning process, and will best advise you on what upgrades or improvements you need to make to the property to ensure it fits your needs, and what lenders look for.
When you work with solicitors and legal professionals, you receive reliable guidance that ensures your project is compliant with regulations, and doesn’t place people at risk. This support is invaluable, and often prevents costly mistakes from occurring.
Have a project to discuss? – You can contact The Money Hub on 0203 725 5830 or complete the form on our website to arrange a call back.
What are the Stages of Development Finance?
While each project is unique, there is a framework which can be loosely applied to all work in this area. The following stages are all crucial when it comes to obtaining property development finance, and then bringing projects to life.
The first stage is the most important, as it sets the foundations for everything that follows. This is where you put together your team, do your research, and come up with a watertight investment plan.
The next stage is to source the funding you need to get your project off the ground. This is where The Money Hub can help, by connecting you with lenders who are willing to support your plans.
Once the funding is in place, construction can begin. This is usually the longest and most expensive stage of the process, so it is important to have a good team in place, to stick to your budget and timescales.
Once the construction is complete, the property is usually sold to clear the finance or you may wish to retain the property and rent out – in this case a refinancing would normally be needed.
How to Explore Your Development Finance Options with The Money Hub
At The Money Hub, we are proud to have helped our clients secure property development finance and realise their investment plans. If you would like to discuss your options, please get in touch. We would be delighted to help you take your first steps towards a successful property development project.