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:-
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.
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.