Development Finance, Refurbishment, Renovation and Conversions
Finance is available to support all transaction types, from major new developments to phased building projects, smaller scale refurbishments and part-built schemes, across residential, mixed use and commercial propositions.
Since 2008 development finance has been seen as difficult to obtain and only available to the few highly experienced individuals or larger construction companies and House Builders. Whilst this was true for a time it certainly isn’t the case today.
In recent years the development finance market has benefited from both new entrants into the market and also established lenders either re-entering or reviewing their development finance criteria. Short-term providers who expanded their proposition to initially include support for refurbishment of property, are now also accepting some development projects.
Both this increased availability of funding and competition in the market have coincided with government initiatives encouraging the conversion of some commercial space (office or retail premises) into residential dwellings under permitted development rights, which has also allowed for some relaxation around residential extensions and improvements.
All of the above has improved both the availability of funding, the level of debt available and the terms on which this can be borrowed.
We have direct access to Lenders supporting all transaction types, and whilst one lender may be the most appropriate for development finance, this doesn’t mean the same would apply across all sectors.
It isn’t always as simple as quoting the lowest rate or highest gearing, the most appropriate terms for a given project are dependent on a multitude of variables; Client status, project experience both directly and indirectly, capital requirements, proposed debt size, post-works completion values, initial site or property valuation, build type, concentration of units, exact site location, project duration and many other associated risk areas.
To ensure the most appropriate terms are delivered for more complex development facilities, it is imperative that a full cashflow is drawn up modelling scheduled build costs over the term against use of borrowed funds to calculate total interest and lender costs, with interest being rolled into the total costs figure for the specific scheme. This is one of the few sectors where the lowest rate and fees doesn’t necessarily mean the lowest overall cost of borrowing.
For refurbishments, development funding isn’t always the most appropriate option, with terms potentially more reliant on the existing value of an asset rather than the end value or cost of works meaning enhanced terms for the client, especially where the expected term of the loan and duration of the construction work is short relative to ‘true’ development projects.
Typically development finance is measured against (combined); initial land or site value, cost of works to build out and the end value or ‘Gross Developed Value’.
It was commonly accepted that most development finance was capped at circa 70%-75% of total project costs and 60% against GDV, however we now have access to multiple lenders offering:
- up to 90% of all development costs (including land value, build costs and interest/fees)
Where property or land is already owned, it is also possible to finance 100% of the build costs, often including improved lending terms recognising higher land and GDV where the client has added value through planning gain.
Whilst 100% of all costs including purchase and build is available, this usually involves a profit share scheme on completion of the development in addition to interest and fees, and clients often prefer to utilise 90% of costs with their 10% share being required at the outset.
Terms are available in the market for virtually all debt sizes, including small refurbishment schemes and with no upper limit for larger development projects. The most competitive terms are available in the £1M to £10M debt space due to the volume of active lenders (terms from 3.50% + base rate), however finance starts at 4.5% plus Base Rate for £200k+ debt requirements, interest rates typically higher for smaller projects.
As part of any proposal we would work with a client and introducer to understand their overall strategy whether planned sale, refinance onto term debt or reinvestment into the next project. It is key to understand this to not only help secure the initial development facility, but ensure the facility is being placed with the most appropriate lender to meet those strategic requirements.
Whilst some lenders’ still fund only experienced individuals and firms, others are happy to review the specific proposition and in some cases rely on the contractor and other professionals involved bringing their experience to that project. Finance is therefore more readily available for new developers or those with limited experience.
Due to a number of factors, including; the change in tax legislation for BTLs and SDLT, reducing property investment yields, relaxation in planning legislation, the demand for development finance has never been greater, with more individuals looking to add value to existing property or realise potential value in new development projects. The financial market has reacted to this demand, Lender criteria now more accommodating and terms available for the majority of proposals.
Perhaps more in this sector than any other, the key is understanding not only which lender and finance terms are the most suitable for a specific client and a specific project, but also their overall property strategy.