With new funders entering into the development finance market, the availability of development finance appears to be as strong as it has ever been, although it is clear that there is no easy way for a developer to apply for new funding.
Thursday 6 February 2020 16:40 Press release
With new funders entering into the development finance market, the availability of development finance appears to be as strong as it has ever been, although from speaking with our own borrowers – some of whom we know have ‘tested the market’ by speaking to our competitors – it is clear that there is no easy way for a developer to apply for new funding.
This is where the Guide to Development Finance, a collaboration between the Federation of Master Builders and UK Finance could be a great help. This is an easy to read guide which highlights the journey from concept to completion and details how best the developer should present a proposal to the funder. A link to this guide is available on the Saffron website (see below) and hopefully, those aspiring developers who are considering applying to Saffron for funding will find the guide a useful tool to aid them throughout this process.
The current state of the development finance market
A latest RCIS survey has shown a 17% increase in new buyer enquiries in December 2019 (up from -5% in November), showing a growing demand and a potential trigger for developers to push forward. And we are now in that period between January and April when typically, we see an increase in development finance enquiries, either from our broker contacts or by direct enquiries.
2019 was a year of uncertainty with property transactions and completions slowing in the lead up to the election. However, the result of the election has appeared to have had a positive impact with buyer sentiment on the rise, more confidence in the land markets and a gradual increase is being seen in values (Savills Market in Minutes- residential development land Q4 2019). The strongest growth has been in our hinterland of the East Midlands and East of England, where two of the major house builders, Barratt Homes and Bellway, have both recently opened new offices.
We have also started to notice this upturn at Saffron. Our partners have told us that developers are starting to feel more confidence, which over the coming weeks and months will hopefully lead to an increase in lending applications, as buyers take advantage of the improving conditions.
What is Development Finance?
Development Finance offers financial support to small and medium sized developers, providing them with financial security during both the construction and sales phases. A developer seeks funding to support them through the purchase of the land and through the build process when their own personal cash may not be sufficient to fund the entire build.
A lender will work closely with their monitoring surveyor and legal partners as well as with the borrower to mitigate the risks of the lending. This will involve a detailed understanding of the development plan. The borrower will need to prove to a lender that they have the required skills, experience and network of expertise to complete the project, from concept to sale. The personal and business wealth and financial status of the borrower will also be a factor in the lending process.
Development lending can be for a term of up to 24 months, to allow adequate time to both build the properties and to sell them; and requires appropriate security, typically against the property assets (a first charge on the land), debentures and personal guarantees. And for the more complex projects, industry standard building contracts and collateral warranties are likely to be required from those with a design responsibility for the project. The lending is drawn down in tranches against work completed on site, once it has been validated by a monitoring surveyor.
Repayment to the lending is invariably from the receipt of 100% of the net sales proceeds.
The Guide to Development Finance is a great resource for developers and for advisors too and can be downloaded directly from The Federation of Master Builders website (www.fmb.org). Development Finance is a structured product that really should be considered against all others by developers wishing to fund a project.
It is also crucial to partner with a lender that is not only experienced in the field, but can educate, guide and provide support in all areas of the build as required. Having worked in this field for many years, at times guiding lenders through the process, I have first-hand experience in the peaks and troughs of the process. The lender doesn’t just lend you money, they lend you their invaluable years of experience too.
Peter Owen
Head of Development Finance
