Property Development Finance Broker

It is fair to say that the UK property developer finance market incorporates a wide spectrum of business models. On one side we have traditional UK banks who have adopted a risk-averse approach since the 2008 US sub-prime mortgage market crash. On the other side, we have the flexible niche finance companies taking in private banks, challenger banks and peer-to-peer lending platforms. These are companies that tend to take a more accommodating approach to risk and a more creative attitude towards the type of securities used as collateral.

Historically, property development finance (often referred to as bridging finance) interest rates were anywhere between 12% and 14%. Developer finance UK rates are competitive and loans are structured to an individual customer’s needs. Comparing high street off-the-shelf packages to niche development finance offerings is akin to comparing apples and pears - development finance in the UK comes from large, small and boutique lenders and each will offer benefits or drawbacks based on your project and the amount you may wish to borrow.  

What many people in the UK don’t realise is that the developer finance UK market is also central to European funding. The European financial sector has very little (if any) appetite for flexible development finance hence the reason many European investors are looking towards the UK. This not only gives UK operators a growing in-depth knowledge of the European property market but also significantly increases their liquidity. This in turn creates an environment in which rates are extremely competitive to the benefit of borrowers.

The enhanced flexibility of the property development finance market is central to its recent and expected future growth. The ability to mix and match different elements of finance, look towards short, medium and long-term solutions and use an array of assets as security are fuelling the market growth. However, development finance in its most basic form is split into two simple elements:-

Purchase Finance

The vast majority of development projects will require the initial purchase of a property and then some form of redevelopment. The first element of a property development finance agreement will address the cost of the initial purchase. Usually, the lender will advance a percentage of the purchase cost with the investor obliged to provide the difference. This ensures that the investor has money at risk which is the greatest means of focusing their long-term attention on success.

Project Finance

It will depend upon the size of the project but lenders tend to release funding stage by stage. For example, the funding for stage II will not be released until stage I has been completed, inspected and signed off. This strategy ensures that the overall financial exposure for both investor and lender is limited in the event of a failed project. The strategy also helps to focus the mind and is particularly effective the more advanced the project – the greater the financial exposure. As each stage is inspected and signed off, there may be short-term cash flow obligations which the investor would need to consider, prior to reimbursement.

Flexible Development Finance

Even though UK high street banks have reduced their exposure to risk in recent times, they still attract the lion’s share of traditional property development finance. However, slowly but surely the likes of private banks, private equity, challenger banks and peer-to-peer lenders are eroding the market share of high street banks. This is a trend which is likely to continue as the ability to negotiate a development finance package which is wrapped around your particular requirements, as opposed to an off-the-shelf deal, can be priceless.

As the development finance market in the UK continues its recover we are starting to see an array of different options emerging. It is therefore essential that advice regarding development finance for HNW investors is both accurate and impartial. Rather than inflexible relationships with a small group of development finance companies, we have access to the whole market, including traditional and niche providers. Through our network of contacts, we are able to structure your deal from start to finish, advising on issues such as suitable investment vehicles to deal structure, flexible finance options to re-mortgaging opportunities or any property development mortgages you require. 

It is fair to say that nobody saw the 2008 US sub-prime mortgage crash coming and the consequences are still being felt today. Many high street banks saw their balance sheets decimated with emergency funding commonplace. The initial step back from UK development finance was understandable although the current lack of appetite is a little surprising. This created a vacuum which has been filled by specialists and private banks across the globe.

One very interesting development revolves around the funding of specialist financial companies by high street banks. In many ways, this gives them the best of both worlds, direct investment in a growing market without a hands-on daily management role. We’ve also seen the introduction of a hybrid short/medium-term funding tool. Offered by specialist finance companies, end of project finance arrangements of between 12 months and 18 months allow developers the chance to organise a phased exit.

Historically, high street banks would have turned away developers looking for this type of extended finance. However, the ability to instigate a more managed exit avoids a short-term drop in prices to address potential cash flow issues. This is one of the reasons why we have not seen a significant fall in property prices (a race to the bottom) despite some concerns about the short term direction of the UK market. In the past, developers often had no option but to exit at literally any price.

It would be unfair to say that high street banks have left the UK development finance market but their appetite has certainly diminished. The new route for high street banks appears to be the direct funding of specialist operations, offering them the best of both worlds. They are still extremely strong in areas such as term loans, buy to let, etc, but rigid deal structures and extended negotiating periods have reduced their competitive edge in development finance.

In many ways, the high street banks come into their own further down the financing chain. Once a development has been completed the next stage is refinancing – enter the high street banks. By entering the process towards its conclusion this reduces their risk profile although it also decreases their potential returns. You could argue this perfectly fits their new risk-averse profile in light of the 2008 US mortgage market collapse.

As we touched on above, specialist lenders filled the vacuum left by high street banks when they reduce their exposure to the UK property development finance market. Specialist lenders are able to create bespoke packages structured in a fashion which is both efficient and cost-effective. In many ways, it is dangerous to compare bespoke development finance offers against the one size fits all/off-the-shelf service offered by traditional banks.

Other important factors associated with specialist lenders are an ability to be nimble, quick thinking, open to new and innovative financial structures and able to bring deals together quickly, sometimes within 48 hours. The risk-averse nature of European banks ensures the lion’s share of the business is funnelled back towards the UK market.

Traditionally, bridging finance property development lenders have been used to bridging funding gaps between property acquisitions, development and the finished article. Once completed a project would simply be refinanced on the enhanced value, raising funds to pay off the bridging debt and often allowing developers to bank a profit. Their role is a little more enhanced in the modern era, providing often complex solutions to an array of traditional and non-traditional scenarios. These can include anything from the acquisition of warehouses to funding requirements for a start-up company. Once established, these entities can then refinance their debt at a significantly reduced rate.

The offering of bridging finance to start-up companies is seen by many as a vital part of the UK economy going forward. Many of these companies have perfectly good business models but risk-averse high street banks prefer them to be more established. So, bridging finance can be a means to an end for many of these companies.

In the past, it was relatively easy to list a number of potential barriers to achieving finance including liquidity, collateral, country of residence, property development experience and type of property involved. Today the situation is very different as specialist finance companies can create a structure which will address the most complex of situations. As a consequence, the main barrier to achieving funding is simply the quality of the deal – do the numbers stack up? Anyone looking for developer finance will need to ensure they have a defined plan of how they will manage funds and a solid exit plan and a waterproof case for borrowing.

Even though the specialist UK development finance market is fast-moving and ever-changing, there are still basic elements which are important to lenders. However, sometimes it is useful to take a slightly different approach to affordability and work back from possible exit routes. We know that exit routes could be refinanced, outright sale or a phased sale over 12 or 18 months, but is the original deal affordable and returns acceptable?

Some of the more traditional elements which lenders will review include development experience, GDV, collateral and the quality of third-party contractors. There also needs to be an incentive for an investor to succeed, often measured by the amount of personal capital invested. Here at Enness, we have vast experience in specialist finance which means flexibility on the structure and very few hurdles which cannot be overcome.

The London development finance market in London has historically been extremely buoyant, fast-moving and central to the UK property sector. It is fair to say that the perceived challenges of Brexit have reduced the historic premium on London property. However, actual property prices have held up extremely well, which is not always reflected in sensationalised media headlines. In simple terms, if the numbers stack up in the London property market then development finance will be available.

On the flipside of the coin, we have also seen a change in the attitude of development finance companies to markets outside of London and the South-East. It is fair to say that the regional markets are still catching up on London's development finance companies but many lenders are increasing their focus/exposure with Birmingham, Leeds and Liverpool performing well. The ongoing focus on affordable housing development finance, and changes in regulations allowing housing associations greater access to debt, is positive and likely to continue in the longer term.

The London property market has been written off time and time again only to return stronger than ever. The firm backbone of demand from both domestic and international investors remains, reflected in the way in which property prices have performed of late.

With experience in arranging everything from market-leading senior debt, competitive equity and specialist products for challenging plans, we can access many opportunities that simply aren’t available on the high street. With connections at every level of the market, we will be transparent and efficient in sourcing the best lender and terms for your circumstances, whether you are a first time developer or major firm.

Our advisers are on hand anytime to discuss feasibility, structure and timescales.

Property development mortgages can be used to fund a variety of activities such as property new builds, conversions, refurbishments and the redevelopment of land. While the initial funding will be based on a business plan and projected valuations, there is a growing demand for flexible property development finance. This ensures that both the lender and the borrower are able to react quickly to changes in the marketplace and new opportunities.