Housing Shortage Sees Development Finance Soar

Posted: 03/12/2015 / 11:07

Posted by: Donna Wells

Given the UK’s extreme housing shortage, it’s no surprise that one of the major growth areas over the past 12 months has been property development.

At First 4 Bridging, we’ve spent noticeably more time in 2015 arranging development finance loans for brokers’ clients than in previous years. The sector really has taken off, and the good news is that there is so much more choice now than a year or two ago.

So what do brokers who perhaps haven’t dealt with development loans before need to know about them? Well for starters development finance is nowhere near as complex as it can sometimes sound.

Development loans are simply short-term loans with one sole purpose, namely to enhance the value of a development project. A bridge, by contrast, could be used for any reason, whether to buy a property at auction or cover an impromptu tax bill.

The security on a development loan, it’s worth stating at outset, is typically a first or second legal charge over the development site, sometimes accompanied by a personal guarantee from the borrower. So all fairly straightforward on that front.

As for how much finance will be provided, the LTV approach used on most term mortgages and bridging loans does not apply here. Instead, lenders will typically look to lend a percentage of what’s known as the ‘GDV’, or Gross Development Value (the projected end value of the development when all work is complete).

By way of example, an average development loan might have a ‘Loan To Gross Development Value’ (LTGDV) of 70%.

As ever, the maximum LTGDV will vary from lender to lender, but is typically based on a number of factors: asset class, the size and location of the project, market demand and the appetite and broader liquidity of the lender or fund. The track record of the borrower will also play a role and lenders will want to see proof of this along with an Executive Summary for the project and a Developer’s Appraisal.

In terms of the rate your client could expect to pay, again this will naturally depend on a number of factors but, on average, borrowers will be looking at between 7% and 12% for a first charge development loan.

The cheaper development finance providers are generally the more conservative senior debt lenders, i.e. the high street and private banks. The more aggressive specialist providers, by contrast, will tend to offer bigger LTGDVs, but charge a premium rate for them, sometimes as high as 15%.

Ultimately, and as with bridging loans, the key to development finance is knowing which lenders will be comfortable with a specific type or size of loan in a specific geographical area.

The fact that there are now so many lenders, with a resulting explosion in products, is a huge positive but it can also be a double-edged sword as it makes finding the right lender more difficult.

If in doubt, ask a master broker and get them do the hard work for you.

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