Property development finance is large-scale funding intended for real estate projects, whether residential, commercial, or mixed-use buildings.

Activities eligible for financing can cover land or property purchase; ground-up work; light refurbishments for aesthetic purposes; and massive structural renovations.

How does it work?

The appropriate loan size is measured against the level of risk loan providers may be exposed to when approving an application.

For instance, a lender’s exposure to risk is higher during the construction phase as the borrower may fall into default and abandon the project unfinished, leaving the security at a condition that is more difficult to sell.

To mitigate risks, lenders usually take loans against collateral, meaning it’s a secured loan. Loan providers also look at the type of security to be offered and the specific details as well as the overall feasibility of the project. In some cases, a borrower’s credit rating is also raked up.

How much can I borrow and what are the costs?

On average, lenders finance 70% to 85% of the estimated market value of the project to be undertaken, leaving the remaining cost to be shouldered by the borrower.

On top of interest rates, there are 1% to 2% arrangement fees to pay. Add to this another 1% to 1.5% usually paid when you hire a broker to bridge you a loan deal.

To manage, risks, lenders release the loan usually in tranches either regularly within a year or against set benchmarks based on the schedule of the build.

If still unable or unwilling to pay for the balance using cash reserves, the finance seeker may need an extensive portfolio of other assets which he or she can pledge as security for new loans.

The release of the funds can either be arranged outright at the beginning of the project or released in tranches distributed at varying points through the project’s finish.

A lot of alternative lenders and some high street banks offer this scheme. While banks tend to have a longer list of requirements and more rigid standards especially for small-sized business, alternative providers offer more leniency and are more willing to shell out a higher loan-to-value size, up to 90% whereas banks can only afford as much as 70%.

However, interest rates are higher with alternative providers. Nevertheless, most experienced property developers strategise on partnering with them, regardless of the higher additional cost, thinking a more significant capital can support two developments, obviously generating more profit than a single development.

Also, alternative lenders tend to be more willing to work with first-time developers.

There are two financing vehicles commonly tapped to fund a real estate related project:

Property development loan

A property development loan is used to fund the conversion of land into a property or the construction of a wide variety of building.

These development loans have shorter repayment terms compared to mortgages, usually taking around three months for light refurbishments and 18 months for larger projects.

In this scheme, the lender can advance up to 70% to purchase the site and up to 100% towards the construction spend.

The release of construction costs is often advanced in stages throughout the project.

Borrowers should commit to being in constant communication with the lenders to give updates and developments on the project’s progress, as well as to maximise the potential profits from the project.

Sample provider: Aldermore

Amount: £500,000 to £25 million

Application to approval: takes a day, “in principle”

Maximum loan to cost: 60%

Maximum loan to development value: 85%

Repayment term: up to two years

Loans purpose: new build, conversion, or refurbishment developments

Interest rates: set on a deal by deal basis

Bridging loans

A short-term financing, bridging loans help people by offering readily available cash for a wide variety of purposes that extend beyond property-related matters; bridging financing can also serve as business funds or payment for tax liabilities–in short, an overall solution to temporary cash problems.

In the property market, bridging loans are generally used for refurbishment, below market-value transactions and transitional assets, among others. This type of loan also allows for speedy purchases of a new property, particularly through auction.

This scheme addresses the long wait it takes to obtain cash sourced from selling an existing asset and prevents a borrower from missing an opportunity to buy a potentially valuable property at a low price.

The cost for refurbishments and upgrades for the property bought through auction can also be covered in bridging loans.

When undertaking this type of project and loan, the borrower should produce a plan to ensure that each renovation or refurbishment is completed on schedule to prevent additional costs and put up the property again for listing and profit.

Sample provider: United Trust Bank

Amount: £75,000 to over £15 million

Max Loan to value: 70%

Repayment terms: one year for non-FCA loans

Besides filling the gap between purchase and sale, loans at United Trust Bank can also be used as working capital; downsizing; portfolio restructuring; term facility repayment; asset purchase and/or refinance

How to apply?

The bigger the project, the more complex the application process may be. However, it’s better to ready yourself with handing these documents and providing these details to get the application done sooner.

  • The exact location of the land or property eyed for purchase and development
  • Permits or certifications from regulators showing approval of the construction work
  • The total cost of the project
  • A detailed monthly spending plan that includes materials to be purchased for the period and allowances for any unexpected or incidental expenses which may be incurred in the duration of the project
  • Projected market demand for the proposed space
  • A resume of everyone in the developing team that will reflect each of their professional experience in taking up property development projects in the past that are similar in the proposed plan