Development Finance Guide

Do I need development finance?

A self-builder is someone who constructs his or her own home to live in. A property developer is someone who builds property – whether it’s one unit or 500 – to sell. And that distinction is what determines which sort of finance each type of builder will seek. Those building to sell will need development finance, which is typically available for projects of up to 50 properties, with our niche tending to focus on schemes of 1-30 units.

Do I need to be an experienced developer to get development finance?

Experienced developers will have access to the most competitive terms, but despite what many people think, development finance is available to those who have never developed a property before.

The loan you get will depend on various factors such as whether it’s a residential or commercial build and whether it’s a renovation, conversion or total new-build, but ultimately development finance is all about the end value of the project and has nothing to do with the developer’s income.

Do I need a large deposit to get development finance?

Another myth to bust is that you will need huge sums behind you to enter this sector. One recent client bought a site for £97,000 and the lender covered £50,000 of that land cost plus the £150,000 build costs, meaning our client invested just £47,000 of his own money. When you can enter this market with relatively low sums like that, it opens up new opportunities for companies, including architectural practices or estate agents, who spend their professional lives advising others on property development matters but don’t realise they could do it themselves.

To qualify for development finance, you will need a minimum of 20 per cent of the total costs of the project (unlike a self-build project, for which you need to self-finance only 20 per cent of the cost of the land). That includes the site acquisition, build costs, professional fees including those of architects, solicitors and structural engineers.

When do I need to think about planning permission?

Experienced developers will often find a site without planning approval and get a bridging loan to fund the purchase. They will then benefit from the uplift in value when the site is granted planning permission – but there is always the risk it will be refused, hence the need for a skilled architect and good relations with local planners.

New developers typically opt for the lower-risk strategy of buying land with planning permission in place. It is then often a requirement of the lender that the developer signs a JCT (fixed price) contract with the builder, with penalties if the project over-runs, goes over-budget or deviates from what has been agreed in any way. It’s certainly in the developer’s interest too and ensures that everyone is covered. From then on, as long as the developer’s costs are realistic, it’s a relatively straightforward process.

Can I develop on the land I already own? Such as in my garden?

You may have heard of accidental landlords – those who, unable to sell their property for whatever reason, decide to rent it out instead. Well we are seeing growing numbers of accidental developers – usually, people who realise great value lies in selling off a portion of their garden. One client, who has a lovely house worth £250,000 with a large garden and separate access route that could be capitalised on, has just been granted planning for three new properties, worth £600,000 in total. It was a good day for him when he woke up and realised he was sitting on a goldmine, but many people don’t realise they can unlock that kind of opportunity with their own home.

There’s undoubtedly greater nervousness about taking on such projects in London, where the end value of property is so high that lenders might be reluctant to assist. One recent client with our London office had plans to build 20 flats, each worth £3m, and no lender wanted to fund £30m in the current climate in which many high-end flats are sitting on the market unsold – and, in many cases, having to be rented out instead.

Elsewhere in the country, where most of the housing stock is under £500,000, we see properties – in particular two-to-four bedroom houses – selling well and no real sense of nervousness about taking on development projects. As with everything in property, taking on a development is a matter of knowing your market inside out.

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