Planning to embark on a large building or regeneration project? Making the right funding decisions is crucial. This article will provide you with a step-by-step guide to property development finance, ensuring you choose the right financing options for your project.
An Overview of Property Development Finance
Property development finance involves the funding of large-scale building projects and extensive renovation works. This includes projects such as new residential housing, office block construction, and regeneration initiatives. It is important to note that property development finance is not suitable for smaller home renovations or property improvements, as there are other financing options available for those cases.
When Might Finance Be Necessary for a Development Project
The scale and scope of your project will determine the type of financing options available to you. For large projects, you will need to seek ground-up development finance, which includes funds for land purchase and construction. Typically, property development finance covers around 70-80% of the build cost, leaving the developer to find the remaining funding. In some cases, developers can use their existing property portfolio as security instead of financing the project with their own cash reserves.
Tips for Planning Your Building Work
The level of interference involved in the refurbishment or renovation of a property will determine the financing options available. Here are the different types of building work and their corresponding financing options:
Light Redevelopment/Refurbishment
This includes relatively unobtrusive work such as aesthetic changes, non-major structural modifications, and improvements to walls, ceilings, and floors. Short-term funding options like auction or bridging finance are suitable for this type of project.
Heavy Renovation
This involves more extensive changes to the building, including major structural modifications such as extensions and moving internal supporting walls. Longer-term bridging finance or short-term commercial mortgage finance are commonly used for heavy renovation projects.
Ground-up Development
This type of development requires a team of professionals, including builders, architects, and tradespeople. It encompasses everything from land purchase to project completion. Financing for ground-up development involves a more complex series of investment releases over several months or years.
Different types of property development finance
Different Types of Property Development Finance
With various financing options available, it can be confusing to understand which one is most suitable for your project. Here are the main types of property development finance:
Commercial Mortgages
Used for purchasing properties like offices, industrial units, and shops. Commercial mortgages work similarly to standard private mortgages, spreading payments over several years based on your needs. For example, a small bakery renting its premises might opt to buy the building instead, substituting the rent with an investment in commercial property. Accessing a commercial mortgage may be easier for established businesses, but lenders assess each case on its merits.
Auction Finance
Primarily used for buying properties at auctions. Auction finance allows you to access large amounts of funding quickly, as auctions typically require payment within a certain period. For example, if you buy a property at a discounted rate and need to secure payment in a few weeks, auction finance can provide expedited funds.
Bridging Finance
Bridging finance acts as a short-term funding option that temporarily bridges the gap between purchasing a property and securing more permanent financing. This type of finance is useful for quick refurbishments or property flipping. For instance, if you find an old warehouse for conversion or refurbishment, bridging finance can cover the purchase and refurbishment costs, acting like a short-term mortgage.
How to apply for property development finance
How to Apply for Property Development Finance
When applying for property development finance, thorough preparation is essential. Consider the following before making your application:
- Ensure you have well-thought-out plans and projections.
- Address potential barriers and demonstrate the feasibility of your project.
- If you have experience in property development, showcase a solid track record; if you're new to the field, provide accurate projections based on well-researched criteria.
- Gather all the necessary figures and answers to financial questions asked by the finance provider.
Experience and Other Considerations
Experience in property development is highly valued by lenders. Having a successful and profitable previous involvement in a project, no matter how small, can significantly enhance your application. It is also beneficial to have a team of builders, planners, and architects supporting your project.
Your property development finance application will be evaluated based on factors such as gross development value (GDV) and rental yield. Lenders often consider GDV when assessing applications, ensuring that the build costs do not exceed a certain percentage. The ability of the property to generate income is crucial, and lenders will look at the rental yield to determine the loan amount and interest rates.
Property Development Finance Application Checklist
Property Development Finance Application Checklist
Before applying for property development finance, make sure you have the following information and documents ready:
- Purchase price
- Total build cost
- Expected end value (GDV)
- Contingency plan
- Full costing breakdown
- Clear timescales, including possible contingencies
- Your "Property Development CV"
- Breakdown of your professional team (builders, planner, architect, etc.)
- Planning permission details
- Building regulations
- Potential yield of the project
Lenders seek solid investments with good rental yields when providing property finance. A well-planned project, considerations for potential setbacks, and a clear understanding of the property's end value will benefit you both in the short and long term.
If you have plans to develop a property or are interested in buying at auction, our team can help you discover the best financing options for your business. Give us a call on 0333 006 9141 to discuss your options or request a business finance consultation below.
