With the lack of housing in the UK it is no surprise that the number of people looking to get into property development is on the rise, but how complicated is it to get finance for these projects? Gary Mckenna, property finance expert explains.
The premise of a new development is not as complicated as some may think, although it can quite often involve standing around in muddy fields listening to the vision of architects…
Property development is by no means a stress free, get quick rich scheme, but should the end value of any project be substantial enough to justify the time, money and effort spent then it is definitely worth considering.
I work with a number of lenders, all with various appetites for different locations, builds and values, so there is a good spectrum of options out there for developers. In general most development lenders like funding to start from £500k upwards but there are some finance options for the smaller projects.
Below I have outlined some of the key factors you must consider when applying for property development finance.
Gross Development Value (GDV)
The gross development value is the foundation of any property development finance application. It allows the lender to determine whether your development is a worthwhile investment and if so, how much they are prepared to lend on it.
As a general rule lenders don’t like the total build costs to exceed 75% of the end value (GDV). Lenders will consider lending 75 – 100% of the build costs (labour, materials etc) and 75% of the land costs as long as that does not exceed 65% of the GDV.
As an example, if you were to spend a total of £750k purchasing land and building a house, you would
expect the end value (GDV) to be £1.15m plus. Anything less and lenders will start to question why
you would spend the time and effort carrying out the project.
Most development finance lenders will lend circa 65% of the GDV.
It is possible to organise a loan to fund 100% of the development costs where the borrower already owns the land on an unencumbered basis.
Experience is one area lenders really do focus their attention on. Property development finance is based on the project feasibility, so you will need to demonstrate you have the experience and capabilities to complete such a project. An ability to show previous projects (even small builds/conversions) can really help an application, as well as showing you have a strong team in place – architect, builders, solicitors etc.
If you are new to property development I would highly recommend carrying out some smaller projects first – even simple renovations or refurbishments will help you obtain finance going forward. Having a strong team of professionals would be especially important in this case.
An essential part to any application - without this document you will find it extremely difficult to obtain finance. All lenders will require a copy of your planning permission documents, which will need to mirror the plans and drawings.
The loan term will usually be between 12 and 18 months, which should include the time to exit (let or sell the properties).
How the loan is serviced can, in some cases, be the choice of the clients with the options being to service the interest throughout the term in a conventional way with monthly payments, or have the interest rolled up into the loan. By selecting to have your interest rolled up you could pay a lump sum at the end of the loan, or deduct from the advance at the start. This can help monthly cash flow and allow the project to be completed sooner.
Property development finance rates
There are no set rates when it comes to property development finance. Each application is priced on a case by case basis with assessments made on the points mentioned above. At the moment, a good benchmark starts from around 6.0%.
>> How I helped a developer receive 100% of the build costs within six weeks
Gary McKenna has left Mortgages for Business for pastures new. For more information or for any questions relating to this blog, please contact the Commercial Team on 0345 345 6788, where one of our consultant mortgage brokers will be happy to assist.
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