Property Development Finance – who is lending?

There are increasing signs of improvement in the property market, but does this mean that property developers will be able to get 100% funding again any time soon?

Well, think back a few years and you will recall that relatively inexperienced developers were able to make good money just by purchasing a property and hanging on to it for six months.  In fact several did and thought they were turning into professional property developers.

That may seem like a dig at novice property developers, but there is no doubt that some lenders were quite comfortable offering very high loan-to-value deals to effectively finance the purchase and development of sites.  They believed that they were safe in the knowledge that if it all goes wrong price inflation alone will ensure that they are secure.  And more importantly the set-up fees, interest rates and exit fees on these deals were really lucrative, meaning that the lenders were making a small fortune on deals that completed.

In today’s market the lenders are steering well clear of anything that could hurt them, and this includes novice developers looking to turn a quick profit.

So What Can a Property Developer Do To Secure Funding?

In some respects it’s back to basics.  Think about the eventual sales process and work backwards.  Identify sites that are in high demand arrears and focus on getting planning permission to create attractive and functional homes that will attract prospective purchasers easily.  Put plenty of thought in to the marketing process of the finished product, and be prepared to share that research with your financial partners.

At the moment many areas have an over supply of two bedroom apartments and a woefully short supply of affordable two and three bedroom family homes. Prospective property developers would be well advised to consider building more family homes to meet with the current demands.

As always location is all important, especially in a competitive market. It is crucial that property developers build the right product in the right place and complete the build quickly. The key is to find areas where there is a low supply but high demand, coupled with thriving local economy and strong employment opportunities, and good commuter links. Also consider less obvious areas where there are signs that employment opportunities are on the rise; however you will need to be able to prove where this assertion comes from.

When working with a finance partner, whether it is a broker or lender, it is really useful to listen to what they are saying, take on board their comments and demonstrate that you are willing to learn, and be guided by their experience.

Environmental issues are top of the political agenda with local authorities and individuals looking for ways to maximise their energy efficiency and reduce their carbon footprints. Think about whether your project is tackling these points, and if they are shout about it!

Lenders to have money to invest in good quality and well managed projects, and if you look carefully at the specialist property development lenders that were busy 4 or 5 years ago you may be surprised to see that the majority of them are still there, and they didn’t take a penny of tax payers money to bail them out of bad deals.

You still may not be able to get 100% property develpment finance just yet, but with the right preparation and support you can still get some very good deals.

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