New Build Development Finance

New-build projects need stable funding from start to finish, and new build development finance lenders provide the tools property developers need in this sector

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Property development is a thriving area of UK industry and developers in the UK are working within one of the most resilient and competitive markets in the world. There are plentiful opportunities for new development projects, and the UK’s constantly-evolving architectural landscape means there’s always scope for new builds. Thanks to the growing demand for quality housing and office space, real estate developers are always on the lookout for new opportunities. This continual growth means there’s always demand for the strong financial backing that these projects require.

New build development finance is a necessary part of any new build project. While residential homeowners might be keen to sink as much capital as possible into their home in order to get a cheap mortgage, the reverse is often true for commercial developers; the more capital they put in, the less they have available to finance other projects. Since their developments should be bringing in a profit anyway, the money that’s not invested in one project can be put towards another, building the developer’s portfolio diversity and overall profitability. Development finance is therefore an important element of any new build project, and a firm understanding of how it fulfils its role is vital for successful property development.

While new build development loans may be an inescapable part of property development, they’re not a “no-brainer”; the terms and conditions of a loan (and its costs) can have a substantial impact on a project’s progress and overall value. Since new build finance is secured against the property itself, the lender will be able to reclaim the buildings if their loan isn’t paid back on time. It’s vital that, before making any commitments, property developers seek the advice of a qualified financial expert.

How does a new build development loan work?

New build loans are provided to finance the entire development process, from purchase through to completion. They are short-term loans, but given the nature of construction they can be extended for up to 18 months - if this term is reached but the project isn’t completed, it’s often possible to negotiate an extension or to seek refinance from another lender. As with other forms of property development finance, such as bridging loans, new build finance is secured on the property which is being constructed, with loans usually constituting up to 75% of the property. However, the total value of the property must be estimated in advance with new builds, because the final value of the development won’t be achieved until the project is completed. This means that loans are assessed against the Gross Development Value (or GDV), a careful estimation of the property’s eventual worth. This requires exceptionally accurate valuations on the lender’s behalf, and they will check in periodically during the loan to assess whether the project will meet its intended value.

The valuation and securitisation of a work-in-progress is a complex matter. The lender cannot provide funds that exceed the value of the asset - for instance, if a developer needs to borrow £3m to finance the purchase of land (£1.5m) and construction costs (£1.5m) of 3 new homes, the lender can’t give them £3m upfront. If they did so, they would be lending £3m against completely undeveloped land; until work begins, the GDV of a property is entirely theoretical. Therefore, the supply of funding throughout a new build project is phased to coincide with certain stages of construction, so that the size of the loan increases with the value of the development.

A common policy is to stage a new build development loan in “tranches”, which are transferred upon completion of a specific stage of work. For instance, our lender in the above scenario might supply £500,000 to sink foundations, and once this has been completed they’ll send in a valuation team to check that the work has been carried out to specifications. They’ll then supply another £500,000 to put up the walls, and repeat the valuation process once this is complete.

Using capital in a new build loan

A developer will still need to supply a substantial percentage of the total build costs of their new properties, and while alternative finance options can help to “top up” their capital deposits they’ll still need to put their money where their mouth is. Generally speaking, new build lenders will stipulate that a developer must use their deposit to pay for the first phase of work to be carried out - once the developer is committed, the lender will then handle payment for the following stages of construction. This has two advantages; firstly, it gives the lender the security of knowing that the borrower stands to lose by pulling out of the project, and that they won’t be left with a half-finished development if the builder decides to leave. Secondly, it means that the developer minimises the amount of interest they pay; the longer they borrow money for, the longer they’re paying interest on it, so by paying for the first stages of construction themselves they can keep the total cost of interest at a minimum.

In some cases, a developer may be able to borrow 100% of the costs of constructing their property, especially if they already own the land on which the development will stand. Enhanced planning permission can also persuade lenders to increase the amount of money they contribute, as the additional security can make the project a safer bet. It’s important to bear in mind that planning permission must be obtained in advance of submitting a new build finance application; only highly experienced developers with a strong portfolio have any chance of obtaining finance without planning permission in place.

New Build Development Finance

New build development loans are an integral part of any developer’s toolkit, and a thorough understanding of the way this type of finance works is vital for developers seeking to begin their own projects. The flexibility and adaptability of lenders in this sector enables property developers to act quickly and confidently, seizing opportunities and escalating projects on schedule.

 

Common Uses Of Development Finance

  • Overview

    Reliable finance is a crucial part of any successful development project, and bridging lenders offer a wide variety of attractive products in this sector.

  • Barn Conversion Finance

    Barn conversions can result in amazing properties, but require a lot of work. Specialist lenders provide vital financial backing to keep these projects on track

  • Construction Finance

    Successful completion of a property development project relies on a strong, stable source of finance from start to finish, which construction finance provides.

  • Conversion Finance

    Conversions come in all shapes and sizes, and conversion finance lenders provide the flexibility and adaptability that developers need in conversion projects.

  • Development Exit Finance

    Development exit finance enables property developers to react flexibly to changing situations, and to restructure their financial commitments to maximise profits

  • Inexperienced Developer Finance

    Inexperienced developers may well have access to lucrative opportunities, and the flexible approach of development lenders enables them to take on projects

  • Land Acquisition Finance

    Successful property development requires stable funding from the very start, and land acquisition loans are an important element of any construction project

  • Mezzanine Finance

    Mezzanine finance is an important ingredient in property development, and it enables developers to take on opportunities they’d otherwise struggle to fund

  • New Build Development Finance

    New-build projects need stable funding from start to finish, and new build development finance lenders provide the tools property developers need in this sector

  • Pre-Construction Finance

    There’s plenty of work to do before construction starts, and the costs of paving the way for a successful project must be met with pre-construction finance.

  • Property Development Finance

    Property development requires specialised financial solutions, and the UK’s development finance sector provides a variety of highly flexible funding options

  • Retail Conversion Loans

    Retail conversions can be lucrative opportunities, but developers must ensure they have appropriate funding to secure planning permissions and carry out work

  • Refurbishment Finance

    Refurbishment finance lenders provide the tools that property developers need to quickly seize and escalate renovation projects from beginning to completion

  • Self-Build Finance

    Self-build projects require a specialist touch, and there are many development lenders dedicated to providing self-build finance for precisely this purpose.

  • Site Acquisition Finance

    Moving quickly is vital for successful property development, and site acquisition finance is an indispensable part of any development finance package.

  • Unmortgageable Property Finance

    Unmortgageable property finance allow property developers to take out flexible finance solutions to refurbish and renovate properties for mortgage or resale

National Association of Commercial Finance Brokers Financial Services Authority Association of Short Term Lenders Association of Bridging Professionals

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