Everyone has to start somewhere, and in the world of property development success is often more about connections and talent than it is about experience. A developer who can get in on the ground floor of a great project will be able to make a big profit even if they don’t have a long track record of success; all that counts is their ability to make the right deals at the right time. However, property development requires capital in order to go ahead, and many lenders are nervous about providing finances for borrowers who are just starting out in the industry.
Past performance is no indicator of future success, though, and a developer with a good track record is by no means guaranteed to enjoy continuing success. A brand new developer with the drive and connections to access profitable developments could well prove to be highly successful, and while many mainstream lenders will write them off there are plenty more who are willing to provide the capital they need. There are fewer restrictions on development finance lenders as to what they can lend on, so while new developers might have no luck sourcing loans from banks they may well still be approved for development finance.
Inexperienced developer finance comes in many forms, but a general rule to bear in mind is that it’s likely to be more expensive than the loans provided to an experienced developer. Every deal is different, and while experience isn’t everything it certainly helps when working on a large development project - lenders may well be willing to lend to inexperienced developers, but this doesn’t mean they wouldn’t prefer someone with a proven track record. It’s important, therefore, for new developers to carefully assess the impact that their development finance package will have on their expenses, and how this will affect their profit margins. Those who are new to development must consult a financial expert before committing to any sort of loan package, in order to ensure it’s the right choice in their situation.
Not just anyone can roll up to a lender and ask for a loan; while they might be willing to lend without a track record of success, it’s still important to demonstrate that the developer’s project will be completed in a timely, profitable manner. Development finance lenders are able to assess each client’s project on its own merits, and will closely examine all aspects of a deal before making a decision. This means there isn’t necessarily a set of checkboxes which need to be ticked, but the developer needs to be able to show that they have a clear, realistic plan for their development.
A key element in this proposal is the exit strategy that the developer intends to use. An exit strategy is the method by which the borrower will repay their loan, and the two most common ways of doing this are through a mortgage or through the sale of the property. The feasibility of the developer’s exit strategy will be assessed by the lender as a crucial element in their lending criteria, because if the developer’s exit strategy is weak they may not be able to repay the loan. Of course, the lender can still recoup their money by repossessing the property, but this is far from an ideal solution.
Inexperienced developers can come in many forms, and the handsome profits to be made from development make it an attractive investment for private individuals that want to make their money work harder. Development is even sometimes seen in the same light as a buy-to-let investment, where a professional might decide to buy a house and renovate it in order to make a profit, or even to build their own. While these individuals don’t have the experience necessary to qualify for many other forms of finance, development finance lenders who can recognise the potential for profit in their plans may well be willing to provide funding for them.
One of the major benefits of acquiring finance through a specialised development lender is the ability to tailor a loan package to each borrower’s needs. Development lenders have much more control over the terms and conditions they offer to customers than banks do, and can create a lending solution that precisely meets a borrower’s requirements. This means that while a lender may have a general limit to the length or amount of a loan, they can often alter these limits if needs be. Similarly, while lenders in this sector are amongst some of the fastest around it may be necessary for them to provide funds at exceptionally short notice. Thanks to their small, agile organisation, development finance lenders can sometimes provide funds in as little as 24 hours.
A key and widely-used feature of development finance’s flexibility is to roll up the costs of a loan. This allows the borrower to pay the costs of a loan off in one lump sum right at the end, rather than servicing the loan through monthly payments. This is especially valuable for inexperienced developers who need to do everything they can to keep overheads at a minimum. The developer can defer the interest and arrangement fees until they’ve sold or mortgaged the property, thus minimising their loan’s impact on their day-to-day running costs.
The property development sector is an exceptionally competitive one, where the amount of money involved and the profits to be made means there’s intense competition for any opportunity that could prove lucrative. At times it can seem like there’s only a limited amount of space, but like any industry the property development sector continues to attract new talent and new developers with a drive to succeed. The presence of lenders in the industry who are willing to judge projects on their own prospects, rather than from the developer’s history, enables these up-and-coming developers to make their mark on the UK property development industry.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
Loans generally range from £25,000 to many millions depending on the size and complexity of the planned development. The amount that can be borrowed depends on the strength of the development proposition, the location, the potential profits, the perceived risks and of course ultimately on the lenders risk appetite.
Not generally. Interest is likely to be rolled up throughout the agreed term of the loan and paid on redemption.
Drawdowns are staged payments made by the lender under the terms of the development finance agreement. These payments are triggered as the development reaches certain key stages. For ground-up developments, after an initial drawdown to cover the purchase cost or the value of land already owned, drawdowns are often triggered at key points of the build. Typically, these drawdowns cover early costs (footings and foundations), wall plate (the erection of external structure), wind and watertight (windows and roof), first fitting (plaster and electrics) and second fix (decoration and completion).
This is unlikely. Funding can usually be secured which incurs no exit fees.