The UK property market has been surprisingly strong in light of Brexit concerns. Despite the doom and gloom headlines since 2016, we have not yet seen the collapse that many so-called experts have been predicting. Indeed, there is evidence to suggest renewed interest in property development. So, what funding methods are available to those looking at property development?
On the surface, funding the cost of a property development out of existing resources would seem to make sense. No additional expenses, no interest charges and once the property is sold/refinanced at least part of the resources can be replenished. However, pure cash funding for a property development is very rarely the best way forward. Your cash is tied up until the project is finished and other investment opportunities may be missed.
Initial purchase followed by development finance
The initial purchase of a property, followed by development finance, often referred to as bridging finance, is one of the more common ways in which to fund a property development project. In general, lenders will release capital up to 75% of development costs and some may even base this on the projected gross development value. The use of development finance can be extremely lucrative if the uplift in capital value is significantly greater than the cost.
With UK interest rates still relatively low we are seeing greater interest in joint ventures in the area of property development. This brings together various parties with something different to offer in the form of finance and practical hands on expertise. While it will depend upon the size of the property development, there are an array of interesting debt structures including senior debt, equity finance and mezzanine finance. Senior debt will fund the majority of the development, equity finance will give a base and mezzanine finance is a type of short-term funding. Used correctly and within a well-structured joint venture these three elements can create a serious uplift in value.
If the figures stack up….
While many people might expect property development finance to be relatively thin on the ground in light of Brexit and other challenges, this is not the case. The property development finance market is huge and if the figures stack up then quite simply the funding will be there. Despite the doom and gloom surrounding the UK property market there are still opportunities to significantly increase capital values with ever-growing demand for rental properties.
While high street banks still dominate the lion’s share of the property finance market, we have seen the emergence of many private banks and niche lenders in recent years. A number of these alternative finance sources are only accessible by mortgage brokers and tend to focus on individually structured property finance arrangements as opposed to off the shelf deals. In reality, any increase in competition in the property finance market should be to the benefit of developers. However, knowing which companies to approach and the information they require to offer a speedy decision is not always straightforward.
The simple fact is that no two property developments are ever the same. There will be different timescales, different challenges and different financial requirements. However, there is growing competition within the property development sector from the more visible high street banks and the behind-the-scenes private banks/niche lenders. This is all to the benefit of property developers and it certainly pays to shop around and even consider hiring the services of a mortgage broker.