Five Considerations when Securing Development Finance in 2022

Updated: Jun 11

Development Finance has evolved quickly with changing appetites for both residential and commercial property as the economy opens up.

The last year has been challenging due to the pandemic but to a degree lending was available and some of the stalled housing and commercial projects were able to complete with assistance fr

om British Business Bank who provided CBILS loan through various banks.

Accelerated Finance reports on five crucial things developers should be thinking about during the year ahead.

Proving Financial Stability

Establishing the net asset position for borrowers is becoming increasingly more important. Lenders will assess liquidity in order to mitigate any time delays, cost overruns or slow sales.

By demonstrating strong finances and being able to resolve any challenges, you will be in a better position to secure finance at a more competitive rate.

Building Cost Contingencies

As an approximate figure, a 5% contingency of total build costs to mitigate any unforeseen circumstances is the minimum expectation for development finance lenders.

During the past year, cost buffers have increased to approximately 7.5%-10% of total build costs. This provides lenders with assurances to deal with the changes in material costs, shortages and duties payable for products sourced outside of the UK.

Additionally lenders sometimes require co-lateral guarantee from the construction companies undertaking the development project. This has been particularly necessary due to the global supply chain breakdown which may not recover for sometime.

Increasing Loan Term due to potential delays

Given the impact of Covid, development programs have been under increased time pressure to achieve sales leading to increased terms by some lenders to mitigate the risk by adding a further three months prior to the pandemic.

Understandably a developer will not always be comfortable with a higher loan term due to the increased interest costs so it is important to find a balance with both parties to ensure the length of the term is correct

Being Clear on the Development Exit Strategy

It's becoming increasingly important to assess the exit strategy and even more so in the current marketplace.

Options could include financing into a buy to let mortgage if the properties are not selling. This will allow for a lower interest rate when comparing to development finance and if they wish to hold finished stock and sell later on.

Monitoring Changes in Loan to Gross Development Value Caps

The market prior to the pandemic was generally offering leverage at 65% (LTGDV). However, some specialist lenders have now pushed this further up to 70%.

While this has changed due to the confidence in the market, borrowers should expect to obtain 65% with the right schemes currently. Lenders can increase the LTGDV to 70 or 75% if additional security is provided.

This article is intended to provide a general understanding of the topic. The contents should not be treated as advice. Your home may be repossessed if you do not maintain repayments on your mortgage.