Property Development is rarely simple, and getting funding can be difficult, especially for first-time developers.
There are exciting new funding options that are constantly being introduced and are tailored to changing market conditions, despite the fact that funding products and conditions that affect financing are also constantly changing.
Accelerated Finance reports on five crucial things developers should be thinking about during the year ahead.
1. Proving Financial Stability
Establishing the net asset position for borrowers is becoming increasingly important. Lenders will assess liquidity in order to mitigate any time delays, cost overruns, or slow sales.
By demonstrating strong finances and being able to resolve any challenges, you will be in a better position to secure finance at a more competitive rate.
2. Building Cost Contingencies
As an approximate figure, a 5% to 10% contingency of total build costs to mitigate any unforeseen circumstances is the minimum expectation for development finance lenders.
During the past year, cost buffers have increased to approximately 7.5%-10% of total build costs. This provides lenders with assurances to deal with the changes in material costs, shortages, and duties payable for products sourced outside of the UK.
Additionally, lenders sometimes require a co-lateral guarantee from the construction companies undertaking the development project. This has been particularly necessary due to the global supply chain breakdown which may not recover for some time.
3. Increasing Loan Term due to potential delays
Given the impact of Covid, development programs have been under increased time pressure to achieve sales leading to increased terms by some lenders to mitigate the risk by adding a further three months prior to the pandemic.
Understandably a developer will not always be comfortable with a higher loan term due to the increased interest costs so it is important to find a balance with both parties to ensure the length of the term is correct
4. Being Clear on the Development Exit Strategy
It's becoming increasingly important to assess the exit strategy and even more so in the current marketplace.
Options could include financing into a buy-to-let mortgage if the properties are not selling. This will allow for a lower interest rate when compared to development finance and if they wish to hold finished stock and sell later on.
5. Monitoring Changes in Loan to Gross Development Value Caps
The market prior to the pandemic was generally offering leverage at 65% (LTGDV). However, some specialist lenders have now pushed this further up to 70%.
While this has changed due to the confidence in the market, borrowers should expect to obtain 65% with the right schemes currently. Lenders can increase the LTGDV to 70 or 75% if additional security is provided.
Further Reading
Disclaimer
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice. Your home may be repossessed if you do not maintain repayments on your mortgage.
