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How Do You Finance A Property Development?



How Do You Finance A Property Development?

Embarking on a property development project in the UK can be a daunting task, even for experienced developers. Navigating the finance options associated with this, can add an extra layer of complexity or even be the difference between a project being successful, or not. Therefore, understanding the nuances of property development finance is crucial.

 

This guide aims to shed light on some of key aspects of financing your property development, available finance options, and key points to give you the best chance of securing something suitable.

 

Understanding Your Options

To begin, it's important to understand your current stage in the development journey and the finance options available. There are several types of finance to consider, such as bridging, self-build, and residential or commercial development finance. Let's explore each option:

 

Bridging Finance

This versatile finance type can be used for diverse purposes, including land purchase, property upgrades, conversions, or releasing equity from other assets to invest in a new development.

 

Residential Self-Build

Although not typically considered property development finance, this option may answer the question: How do you finance a property development? if you are looking to build your own home. This allows individuals to borrow money to construct their own homes. Some high-street banks and building societies offer self-build financing.

 

Residential Development Finance

Designed to finance the purchase and development of residential units for sale or rental purposes (build to rent). It can be further categorised into Senior, Stretch Senior, Mezzanine Finance, and Equity Financing (or profit sharing) or Joint Venture (JV) Finance.

 

Commercial Development Finance

Like residential development finance but tailored for construction or renovation on commercial assets. 


 

The Application Process

Navigating the application process for development finance requires meticulous planning. Developers should be prepared to provide comprehensive documentation outlining their previous completed projects, current project details, financial projections, the expertise of the development team, and the exit strategy, which we will discuss later in this guide. 


 

Criteria for Approval

Lenders evaluate several factors when considering a development finance application. These include creditworthiness, deposit amount, availability of personal guarantees, project feasibility, and the experience of the development team. Developers should ensure their preparations address these criteria to increase the likelihood of approval. 


 

Loan to Gross Development Value (LTGDV) and Loan to Cost (LTC) Ratios

Understanding Loan to Gross Development Value (LTGDV) and Loan to Cost (LTC) ratios is essential for developers seeking financing. These ratios determine the percentage of the project cost that lenders are willing to finance. Striking the right balance between LTGDV and LTC is crucial for securing the optimal loan amount and establishing a viable financial structure for the project. 


 

Exit Strategy

Since development finance and bridging are short-term borrowing products, typically lasting no more than 2-3 years, having a solid exit strategy is essential. This strategy demonstrates to the funder how you plan to repay the loan and ensure profitability. Potential exit strategies may include selling the property, refinancing, renting out the units, or a combination thereof. 


 

Risks and Mitigations

Property development offers exciting opportunities, but it also carries inherent risks. Identifying potential risks and implementing effective strategies to mitigate them is crucial for developers and lenders alike. From market fluctuations to unforeseen challenges during construction; a comprehensive risk management plan, including a financial contingency, is vital to safeguard the success of the development project. 


 

How Do You Finance A Property Development?

In conclusion, financing a property development requires understanding the available finance options, managing the application process effectively, considering LTV and LTC ratios, evaluating interest rates, formulating a solid exit strategy, and implementing risk mitigation measures. If you opt to work with a broker, they can guide you through the process, secure competitive terms using specialist software, experience, and lender connections. Most importantly, they can be part of your professional team and support you until the successful completion of your project.



 

At MRG Private Clients, we believe in providing our clients with personalised guidance and support when it comes to making important financial decisions. We are based in Medway, Kent but offer our specialist mortgage services nationwide. Learn more about our specialist mortgage services >

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