Let’s talk money.

Business Insights

Among the constant discussions about the housing shortage, and the difficulties surrounding gaining planning permission, despite recent relaxations. Where the money comes from to buy and develop tends to be overlooked by all but the developer themselves.

Whether you are a property developer, independent house builder, investor or landlord looking to improve your property or properties there is an overwhelmingly range of property finance options available. Careful consideration will be needed to decide on the best route for you before taking up the first offer.

Aspects you will need to consider include, the type of development it is. New build, Demolition/conversion, Heavy refurbishment, Light refurbishment ? How quickly the finance is needed. In the next few days, the next fortnight, next few weeks or in the next few months? How long for? A few weeks, a few months, a few years or more than 5 years?

Lenders will want to know if you have any previous experience of property development, and if so what. Refurbishment and sale, refurbishment and let, ground-up development of a single unit or of multiple units? They will also need to know whether you have planning permission, and if so what kind? Permitted Development, Pre-application, Outline planning or Detailed planning ?

You will need to confirm that you already own the property or site, whether or not there is a mortgage on the property, and whether or not building work has already started.

These considerations will help refine your choices. Some lenders specialise in short term finance, that can be used for the development of a new building project, or refurbishment of an existing property. Lenders will look to advance up to 70% of the gross development value, and terms can be up to 24 months whereas other will offer staged payments and some are happier making a longer term investment, in which their capital is secured by a commercial mortgage on the property or those who will take a stake in the development, and may look to see an early return.

The most important question to ask before you explore your finance options is how extensive the building works will be? To determine what type of finance you need, it’s useful to think of projects in three broad categories:

Light refurbishment, is the most straightforward type of project, where in general the main changes are aesthetic rather than structural, but may involve some internal work on floors, ceilings and walls.

Heavy refurbishment or renovation, covers more than just aesthetic changes, including moving internal walls, plumbing, or electrics, adding rooms and external walls, or even partial demolition and rebuilding.

Ground-up development is the most involved type of property project, starting with an empty plot of land, or a very heavy refurbishment/conversion (for example, when nothing remains but stonework).

Depending on the type of project you want to embark on, there’s a world of finance options available. You might want a 'refurbishment bridge', which funds 3–24 months of building costs and sometimes comes with the option to convert into a mortgage later on. This type of product would cover the majority of light and heavy refurbs.

Then for more extensive projects and ground-up developments, you can find 'development finance' to cover both land purchase and building costs. For example, if a developer wants to buy a plot of land for £100,000 and spend another £500,000 building properties on it, a lender might finance 50% of the plot purchase and 70% of the build.

Experienced developers who act as landlords can also use property they already own to secure lending. With enough equity free in your portfolio, you can get finance to buy more properties — allowing you to grow your property portfolio without having liquid cash.

While talking property portfolios, commercial landlords should not overlook the possibility of making a claim against Fixed Capital Allowances which allow commercial property owners to claim qualifying items of capital expenditure as a tax deduction and are a valuable tax relief. The aim of a Property Capital Allowances claim is to recover tax paid and reduce tax liabilities for companies and individuals that have spent capital buying and/or improving commercial property.

As you can see, property development is a complex area, especially when it comes to finance. Ultimately, the best first step to take when determining what type of finance you need is to assess how extensive the project is, how long it will take, and how much it is likely to cost — in both the best- and worst-case scenario.