Property development finance - a borrower's guide

POSTED: 2nd May 2014
IN: Personal Guides

With demand for housing currently exceeding supply in many parts of the UK, there is plenty of scope for property developers to meet a strong requirement for new stock and turn a profit in the process.

With demand for housing currently exceeding supply in many parts of the UK, there is plenty of scope for property developers to meet a strong requirement for new stock and turn a profit in the process. undefined

Not many developers have the ability to take on projects without some sort of financial support, so securing credit is likely to be a key step.

Those who are able to gain the necessary finance for their planned ventures can take advantage of some promising prospects in a market that is crying out for new homes.

The property development market

Various regions across the UK are currently offering a wealth of opportunities for property developers, owing to the disparity between strong demand for homes and insufficient supply of new housing stock.

This trend has been highlighted by research from industry bodies including the Royal Institution of Chartered Surveyors (Rics), which this month released a report indicating that house sales had reached a six-year high.

A Rics survey of chartered surveyors found that respondents sold 22.7 homes on average in the three months to March 2014, the highest amount since February 2008.

During March, buyer enquiries increased in all parts of the UK with the exception of Wales, according to the data.

Rics noted that, while activity is showing "encouraging signs of life", the market in general remains hampered by a lack of new homes.

This has contributed to a trend of rising prices, with 57 per cent more chartered surveyors experiencing price increases rather than falls in March.

Simon Rubinsohn, chief economist at Rics, pointed out that the housing market recovery is "well and truly underway" and mortgage finance is becoming easier to access.

This has prompted buyers to "test the market" in various regions, not just in the south-east.

"That said, it is a major concern that we are not seeing enough houses coming onto the market," he added.

"For the market to operate effectively, we desperately need more homes in areas where people want to buy and want to live. Until this happens we're likely to see prices continue to increase and it is going to be ever harder for many first time buyers to conceive of ever owning their own home."

Savills also underlined this issue in a recent report focusing on Windsor and Maidenhead, where demand is exceeding supply so substantially that the recovery of the sector, as well as house price growth, are well in excess of other parts of the south-east.

According to the real estate adviser's findings, Windsor and Maidenhead is the only borough in Berkshire where house prices are above their 2007-08 peak.

Underlining the need for new homes in the area, Nick Gregori, a research analyst at Savills, said: "The latest planned housing target for the borough is 701 net additional dwellings per year.

"In recent years the new dwellings delivered have been significantly below this level, with under 200 delivered in both 2010-11 and 2011-12."

Property development finance options

Developers planning projects to cater for this need for housing should ensure they are aware of the funding options on offer.

Property development finance is generally available for a range of initiatives, from small-scale renovations of existing homes to major plans to turn a bare patch of land into a large residential complex.

Credit is likely to be offered on a short-term basis, with a maximum loan term applying.

The overall amount available to developers will be determined by the current value of your site and your project costs, which will help the lender decide on a maximum loan to gross development value ratio. Most credit providers will follow policies stating their minimum and maximum loan amounts.

In terms of the cost of your borrowing, property development finance differs from commercial mortgages in that it will not come with a set interest rate. Instead, your rate will be decided following negotiations between you and your lender.

There will also be fixed expenses to take into account - such as arrangement and exit fees - which are likely to be higher than on commercial mortgages.

Even though the economy is in recovery and credit conditions are starting to improve, many lenders are continuing to take a cautious approach when it comes to offering finance.

This means you might have to meet some fairly strict criteria before securing a loan. Conditions could include having a proven track record of successful developments and already owning the land, with planning permission for your work. Some lenders may require evidence of a buyer being lined up before accepting your application.

For developers looking for a short-term financial solution to help their project along, another option is a bridging loan.

These products can prove useful as a stopgap when cash or credit is in short supply, but come with a number of drawbacks, the most significant of which is their typically high rate of interest.

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