Development finance has multiple applications, and with the sector evolving quickly around changing appetites for new residential housing and commercial development projects, it's essential to stay ahead of the curve.
Over the last year, it's been tricky for many developers to secure the borrowing they need. This challenge is owing to stalls in the lending market, lack of confidence, and uncertainty about the future.
However, now the UK is on the route out of lockdown, and restrictions are tapering, the development lending sector is coming back to life with vigour!
Revolution Brokers reports on some of the most crucial considerations when applying for development finance in 2021 and what lenders are looking for when assessing development projects.
The Five Essential Factors in Securing Development Finance
While our recommendation is always to seek independent advice from a whole-of-market broker, there are also a few fundamental considerations before proceeding with a development finance application.
Although many development finance lenders now agree to loans with greater confidence, it remains vital to prove liquidity and financial stability to secure the most competitive rates.
Lenders will need to look at your net position closer than in the past and ensure appropriate contingencies are built-in for scenarios such as time delays, slow sales or increased costs.
If you can demonstrate that you have solid finances and can manage any challenges without requiring additional external funding, you will be in a great position to secure the borrowing you need.
Along with stable finances, development funding lenders are comfortable seeing a diligent and prudent approach to budgeting and forecasting.
As a rough guideline, Revolution recommends building in at least a 5% contingency on your initial budgets, given the likelihood that build costs will increase during the development.
Many lenders are happier with a higher contingency of between 7.5% and 10%.
That might seem high, but it also reflects rapidly changing raw material prices. Many are leaping up with additional import costs, shortages and duties payable for products sourced from the EU.
Cost buffers aren't lazy budgeting - they reflect an awareness of the potential for cost increases and inspire greater confidence that your sums reflect reality.
Similarly, as lenders are looking for robust financials, they're also more likely to approve development finance applications where the loan term feels suitable.
Although there is often a temptation to opt for the shortest possible term to reduce the development finance interest costs, it's equally crucial to acknowledge that time delays or sales periods for residential development sites can add significantly to the end of the term.
Many developers have reported intense pressure to achieve sales in a less than ideal climate during the pandemic. So many lenders are requesting additional buffers be added to loan terms to ensure this doesn't happen.
There is a delicate balance between reducing the day-one development finance sum available on a longer-term deal, with a higher total interest cost, and trying to maximise day-one financing with the risk that the term won't be sufficient.
Revolution would generally suggest adding around three months to a turnaround time you would have anticipated before the pandemic.
Secure Development Exit Strategies
The exit strategy is crucial to the viability of any development finance application, and even more so in the current marketplace. In some cases, it's necessary to consider longer-term financing options if you can't sell a development property fast enough.
It's highly advisable to consult the Revolution team if you'd like to revisit your exit strategy or would like professional guidance about the potential scenarios.
One option could be to look at BTL mortgaging and whether this is a potential refinancing solution if properties aren't selling.
Buy to Let mortgaging is available at a lower interest rate than development finance and can be a lifeline for developers sitting on finished housing stock.
Before the start of the pandemic, most UK development finance lenders were offering up to around 65% LTGDV - loan to gross development value.
Some specialist lenders could push this higher and offer up to 70%.
However, many lenders pulled this back, and standard market caps for most development projects are currently restricted to around 60%.
While this may change as things move forward, it's unlikely you'll get an LTGDV rate of anything higher than 65% in the coming months.
Considerations when Applying for Refurbishment Development Finance
As well as property developments and commercial construction projects, development finance is often used for refurbishment financing.
There are similar considerations here, and it's essential to analyse the budget, timescales and saleability of your renovation or refurbishment or the valuation of the completed property to ensure your exit strategy is stable.
Many properties throughout the UK have appreciated over the last year, so if you are looking to proceed with a refurbishment finance application based on a valuation more than a few weeks ago, it may be well worth revisiting this.
Lenders will require an independent valuation before making an offer. Still, if you have reliable pricing information to support your application, it demonstrates the confidence that your refinancing or sale plans will be achievable.
It's also essential to think about whether you need a heavy refurbishment loan or a light refurbishment facility:
- Light refurb lending is typically approved faster than for heavy refurbishment applications.
- You will need to budget for inspections and surveyors costs for heavy refurbishment projects since they'll need to comply with planning and building regulations.
- Monitoring will also depend on the scale of the project and the size of the loan, with lenders having varying monitoring requirements throughout the development works.
- Most heavy refurbishment development loans will require interim surveys by a quantity surveyor.
- Light refurbishment loans are lower risk and therefore carry generally lower costs. On average, you're looking at around 0.65% a month for a light refurbishment compared to approximately 0.75% per month for a heavy refurbishment project.
The takeaway is that, although it may have been challenging to find development finance over the last few months, most lenders are now opening their books again and accepting new applications.
If you can invest more time in initial research and work with the Revolution team to structure a compelling application, there is no reason you can't secure competitive development finance borrowing to get your project off of the ground.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.