Property Development can be just about anything, from light refurbishment of a house to large scale new builds of any type of property. So lets take a look at some of the different types of property development finance available.
Residential Property Development Finance
With the current pressure on the finance markets the novice developer is going to struggle to obtain more than 65% to 70% of purchase price and 65% to 70% of the development costs.
The experienced property developer may be able to raise 100% of site and build costs, but a proven track record and other assets to offer up as security are going to make a big difference.
In all cases the lender is going to insist that the development is supervised by a Quantity Surveyor (QS) with funds released in arrears on the completion of pre-agreed stages.
Most property finance lenders are looking for evidence of a good profit margin on any development, mostly likely in the range of 15% to 20% return on costs, this is to provide sufficient margin for over run, slow sales or other problems.
One of the challenges with arranging property development finance is that many of the lenders working in this market do not tend to publish clear criteria. They are more likely to examine each proposal on it’s own merits.
Commercial and Semi-Commercial Property Developments
At its most basic level the initial information that a lender will ask for is identical to residential developments, but once passed that basic assessment the situation changes.
Nearly all lenders will want to pre-lets or pre-sales to have been negotiated prior to funding the construction. The value of a commercial property is underpinned by the quality of the tenant and lease on that property, therefore a bluechip tenant on a 25 year, full repairing lease is going to be more impressive than a sole trader on a 6 year lease.
Where good quality pre-sales or leases are in place a commercial property development can attract high levels of funding, however this is likely to be in the form of a senior lender agreeing to secondary or “mezzanine” funding – which can be expensive.
With both commercial property development and residential development the status of the site prior to completion is key. Outline planning has some value, but it should be remembered that planning authorities can impose restrictions or changes which can radically affect the viability of a proposal. For this reason it is far better to look at sites with full planning wherever possible.