From deposits to the types of finance available for your property development project, our blog will help you kickstart your development finance plans.
Whether you’re looking to build new properties, make structural changes to an existing property, or completely change its use, development finance covers a wide range of areas to support your property investment plans.
Property development is a complex and highly specialist market, so it's essential you have a thorough understanding of the sector and work with experienced professionals (such as ourselves) to help you get started.
Is property development a worthwhile investment?
Property development is definitely a worthwhile investment, but as mentioned above, it’s a complex and difficult market to navigate, particularly for those just starting out. When done correctly with the right team and broker to support you, not only are there plenty of financial benefits, but it’s also a highly rewarding investment type.
What finance options are available for property development?
Development finance is a short-term loan typically used on out-of-ground projects or extensive refurbishments on existing buildings for residential properties.
While out-of-ground developments will give you higher returns, heavy refurb projects are often more cost-effective. This is because most of your development costs will come from your foundation's work in out-of-the-ground development. Generally, when a project costs more than £250,000, it's common to use development finance instead of light refurbishment finance.
How does property development finance work?
Development finance differs from other types of short-term loans as it’s released in agreed stages throughout the works rather than in one lump payment. These pre-agreed funding points allow your lender to keep track of your spending and the progress of the projects. For many developers, the funding is paid retrospectively, and you will likely need to cover the initial costs to get the work started and pay your contractors.
Furthermore, funding for out-of-ground developments is split into two parts:
- Property land loan – This is released as one loan to allow you to purchase the land.
- Development loan – As above, this is drawn down in tranches across the term of your development loan.
What deposit do I need?
There is no one-size-fits-all when it comes to your deposit, as lenders will want to see significant evidence to support your application. For example, the more experienced the developer, the less upfront deposit you’ll need. Most lenders lend up to 70% of the gross development value (GDV) and up to 85% of the total costs.
Some lenders will allow mezzanine finance, where a third-party investor will help you to fund the deposit. We have contacts to help developers source mezzanine finance, so get in touch to see if we can help.
How long does the process take?
The complexity of your project will impact how long it takes to secure your development finance. Typically, cases complete 3 months after your initial enquiry, but this can go up to 6 months for more intricate deals.
3-6 months is, of course, much longer than any other type of property finance. However, it’s important to note that there’s much more to your application than just your valuation. An independent surveyor will look at:
- Detailed costings
- A realistic schedule of works
- The credentials of the main contractor/professionals
They will also want to see a minimum 10% contingency in your plans as added security, for cost overruns, as an example.
Which lenders offer to property developers?
The property development market is highly saturated with mortgage lenders. At MFB, we have established relationships with 25-30 different lenders. Our experience working with them means we trust they have the expertise to handle your case and deliver the high level of service you expect.
With so many lenders offering development finance, our expertise and knowledge of this complex area mean we’re best placed to find the right lender to fit your individual enquiry and needs.
What experience/qualifications do I need?
Getting started in property development for the first time can be particularly challenging. Most developers we work with have considerable experience and have worked up to full out-of-ground developments. However, there are ways to build up your “development CV” and increase your chances of accessing finance. These include:
- Refurbishment projects (e.g. HMO conversions)
- Extending investment properties
- A joint venture with an experienced developer
This experience will help you justify your skills and ability to your lender. When building up your portfolio, remember to evidence your work properly. Your CV should show what you bought the property for, photos throughout the development process, your project plans and schedules, and what you rent/sold for.
Alongside your portfolio and CV, lenders want to see you working with a good management team, an experienced project manager, a reputable architect and, ideally, a fixed-price contract with a contractor who can demonstrate appropriate experience.
Understanding your market
One of the best ways to ensure good financial returns from your development project is to understand your market. Identify who you will be selling to, whether that’s a residential or commercial market, and find ways to ensure your properties appeal to that group.
For example, if you plan on developing new-build properties, who will you be selling to? What features will appeal to your ideal market group? What are they looking for? These considerations will help you ensure a high level of interest once your project is finished.
How to get started with property development
Property development is a challenging and complex market, but working with experienced brokers can help you make well-informed property investment decisions.
We can walk you through the process and help you submit your application to a lender, answering any questions you may have along the way. With over 37 years of experience in the development finance space, you can be confident that we’ll find you the right lender to suit your needs and secure the best rate for your circumstances.
