Property development finance is increasingly flexible, and you will want a finance package that is structured from start to finish.
Enness’ team of property bridging loan experts will help you understand your bridging finance for property development options and access the best investment vehicles and deal structures. Enness can also help you source everything from flexible finance options and development bridging loans to re-mortgaging opportunities.
Lenders provide bridging loans for property development in stages, not a lump sum.
The capital you are offered in an initial phase will usually cover the purchase of the land you will build on if this is required. However, lenders will usually want most of your finance to be reserved for the development itself, given this is the most crucial part of the project and where you’ll need the most capital. Lenders tend to release finance in stages after pre-agreed portions of the build are completed.
As each phase of work is finished, your lender will certify that the work has been carried out and will then release funds. Your suppliers usually won’t start work before they have been paid, but your lender won’t release funds until each stage of the development is finished. As a result, you will need to have sufficient liquidity to pay suppliers before you are effectively reimbursed by your lender. Being able to manage cash flow is a critical element of property development success.
Property development finance comes in the form of a short-term loan or a development bridging loan, lasting a maximum of about three years, although 12-18 months is more common. This type of finance is always used to fund the development project rather than as a long-term financing solution like a mortgage.
If you are a first-time property developer, it can be daunting trying to bridging finance for property development. Presenting your project to lenders, finding the best terms and rates in a crowded marketplace, and navigating negotiations alone is often stressful.
There are many different opinions and advice for first-time property developers, and it’s easy to assume lenders will not be enthusiastic about letting you borrow: this isn’t necessarily the case. Many lenders will have an appetite for letting you borrow if you have the right project, and your profile interests them.
Lenders will always approach you more cautiously if you are a first-time developer, and more than anything, your numbers need to add up. If your numbers look good, in most cases, it is presenting a solid case to lenders that will make or break a negotiation. Enness regularly works with first-time property developers. With access to the whole lending market, Enness knows precisely which lenders will be interested in your project and who can consider lending. Enness can approach lenders, negotiate, and present your application to lenders on your behalf, making sourcing finance less stressful and much faster.
More than just a broker, Enness can act as a trusted partner. As well as negotiating property development finance for you, Enness will also look at your plans and help ensure you have a feasible project that lenders will be interested in.
For experienced property developers, it can be tempting to approach the same lender for each new development project you take on. There are undoubtedly benefits to this: your existing lender will know your track record and will have faith in your ability to handle the developments you want finance for. That said, it is always worth regularly checking the market and ensuring you have the best rates.
To survive, property development lenders must be competitive in a crowded market. As an experienced developer with a good track record and a solid profile, you will find that you have your choice of lenders. If you are prepared to spend a couple of days shopping around the market, your track record can often open other doors for you. Often, you can find a better deal and the same (or better) terms than you had in the past.
Changing lenders doesn’t have to be complicated or entail an uncomfortable adaptation process. Enness’ team will understand your requirements and how you have approached projects with your lenders in the past. Then, your broker will confidently make introductions to lenders that can offer you a better commercial bridging loan for property development.
If you are an experienced property developer with a new project on the horizon, approach Enness to discuss your needs. Enness’ property development brokers will have a transparent conversation with you about your requirements. They will be able to tell you if they can get you a better deal from a different lender. You are never under any obligation to take things further, but you will have a clearer picture of how your financing stacks up against the market.
Over the past few years, the property development finance market has become more competitive, with more lenders entering the space to cater to increasing numbers of developers and projects. Lenders, needing to stay competitive, have adapted and changed their offering to meet developers' needs better. As a result, it’s possible to mix and match different types of finance, including short, medium, and long-term financing solutions, and use an array of assets as security.
Today, property development finance is often used as a blanket term for many different types of funding. However, these are the two main financing categories:
Most development projects require you to purchase a commercial or residential property before you can develop it. Purchase finance covers the first part of this scenario, helping you finance the initial real estate purchase. In most cases, your lender will give you a percentage of the purchase cost of the property or land. It will be up to you to cover the remaining amount. Lenders opt for this approach because it motivates developers to keep the project running on time and on budget, given that a significant amount of their own capital is tied up in the project.
Generally, lenders will release the cost of the development of the property in defined stages. This is particularly true for large projects, but if you have a minor renovation or development that’s low risk and doesn’t have lots of different stages, lenders can sometimes be open to releasing funds all at once.
In all other cases, funding is released in phases: finance for phase two won’t be released until phase one has been completed and so on. Your lender will also inspect each phase and formally sign it off before funds are released, so the process isn’t instantaneous, and you will need to factor it into your planning and cash flow projections.
Again, lenders adopt this strategy to reduce risk. You and your lender are partially protected if your development project fails because you hSaveave only received a portion of funds, and the closer the project comes to completion, the less likely it is to fail. As a borrower, you are also motivated to keep the project moving and on budget.
Property development used to cost much more than it does today, historically sitting somewhere between 12-14%. As more lenders have entered the market and mainstream banks have withdrawn from certain types of deal, rates have become much lower.
Today, mainstream lenders will offer around 4-4.5% for a commercial bridging loan for property development. Specialist lenders offer rates of between 6% and 6.5% but, in return offer 75% of the gross development value (GDV). In comparison, borrowing from mainstream lenders costs less, but these lenders will offer finance at just 50% of the GDV.
Your profile and track record will also influence what a lender will offer you. More liquid developers who can showcase a track record of successful projects and who are developing in-demand property in sought-after areas will get better rates than a first-time lender with a development project that carries more risk.
No matter how experienced you are and the quality of past developments, lenders will never let you borrow so much that you aren’t highly motivated to make the project succeed: a little bit of pressure is part of the game. However much you want to borrow, your lender will always balance the deal so that you have to invest enough personal capital that will make it impossible not to give the project your all.
Finally, don’t waste time pre-empting lenders’ judgements just because you have a development with an element a lender could potentially be wary of. Be frank and forthright with your lender and explain things clearly and with confidence. If your overall project and finances are solid, the right lender will be open to letting you borrow; they may simply offer a little less finance and charge a little more.
There is an abundance of property development lenders that can provide a commercial bridging loan for property developers, and they all offer something different and serve different parts of the market. Highstreet lenders can be ideal for smaller development or renovation projects, for example. However, they generally have little appetite for offering high-value development loans or commercial development projects.
For their part, specialist lenders and private banks may offer larger loans, but they tend not to lend for smaller projects. Specialist lenders provide development finance on a case-by-case basis, and the rates they offer will be tailored to your project. Highstreet lenders have different underwriting processes, which tend to be less flexible, meaning they offer fixed packages rather than the personalised deals which are the norm for specialist lenders.
The approval timescales are also very different. High street banks predominantly cater to high-volume, lower-value property development finance. Timing for smaller deals is often less of an issue, and these lenders can take between six and eight weeks to make a lending decision. Comparatively, specialist lenders with an appetite for development finance may be able to make an offer in as little as 48 hours.
Every lender will approach property development finance and underwriting uniquely, and they each have their own lending preferences. That said, whichever lender you approach, they will always consider your development experience, the GDV, the collateral and the quality and track record of the contractors you are working with.
Whatever the size of your project, lenders will want to know how you plan to exit the loan. When it comes to your exit, you must have a firm idea of how you will repay the bridging loan for property development before you start approaching lenders, and you will need to share the figures with your lender, who will need to agree on them.
There are three main routes to exit: you can either sell the development at a profit to pay back the loan, use alternative sources of capital (i.e., from other property sales or funds) or refinance. The best option for you will depend on your project, financial situation at term, and preferences – some developers always refinance, others always sell their property. There is no right or wrong way to exit, but you must have a plan, and it must be feasible in terms of returns and affordability.
Europe has very few options for flexible development funding, and much of Europe’s development finance comes from the UK. Whether you want to develop property in the UK from abroad or are a UK resident but want to develop foreign property, Enness can source and negotiate competitive financing.
It is often easier to fund international commercial development projects than it is smaller or individual developments. Commercial developers tend to have different connections, and large institutions are willing to lend on the basis of higher returns.
If you are undertaking a personal development project or a smaller development for investment purposes, finding lenders can often be more of a challenge. Enness has contacts in every part of the lending market and can access the institutions that can provide this highly specialist funding. One point of note: lenders will usually not be willing to lend in every jurisdiction, and you will find it easier to borrow if you want to develop property in a prime location.
Traditionally, bridging finance for property development lenders have been used to bridge funding gaps between property acquisitions, development and the finished article. Once completed, a project would simply be refinanced at an enhanced value, raising funds to pay off the bridging debt and allowing developers to bank a profit.
Today, bridging loans for property development have evolved. Lenders have an enhanced role, often providing complex financing solutions in various scenarios. These can include anything from the acquisition of warehouses to funding requirements for a start-up company. Once established, borrowers can then refinance their debt at a significantly reduced rate.
Enness has experience arranging everything from market-leading senior debt to competitive equity and specialist financing products. Partnering with Enness, you will be able to access more opportunities from lenders who offer more flexible terms and better rates than you will find on the high street.
Enness has connections to more than 500 lenders, and these have been cultivated over more than a decade to cover the needs of every type of developer and loan amount. As a result, Enness will always be able to source the best lender and terms for your circumstances, whether you are a first-time developer or a major firm. Enness will structure your deal from start to finish, and your broker will help you understand everything from suitable investment vehicles to deal structure, flexible finance options, development bridiging loans and re-mortgaging opportunities.
Enness’ property development finance brokers are available 24/7 during development financing deals to ensure the transaction runs smoothly, on time and you can draw down funds as quickly and efficiently as possible.
Whether you are an experienced property developer or you are looking to finance your first development project, Enness will be able to help you access the best rates and the most flexible terms available. Get in touch to hear more about how Enness can help you with your bridging loan for property development, or learn more about what kind of finance the team would be able to source for you.Schedule a Discovery Call