Development finance in the UK is a well-established industry with hundreds of lenders and borrowers across the country. Navigating these lender’s requirements can be a difficult task, especially for first time developers. The first step to understanding development finance requirements UK lenders assess is to understand the lender’s expectations and approval process. This article will outline and explain the key requirements for property development finance and how borrowers can address them.
Development Finance Requirements UK Developers Should Understand
Experience and Track Record:
Perhaps one of the most important aspects of eligibility for development finance UK lenders assess is the developer’s experience and track record. First-time developers or inexperienced investors are seen as being high risk borrowers for a multitude of reasons. Firstly, property development is a complex process with hundreds of factors to consider, even the most experienced property developers can overlook these factors, leading to drastic effects on the project. In order to mitigate this risk, lenders prefer experienced developers who have experience navigating these risks and understand their impact on the project. Secondly, experienced developers are more likely to understand the development market, ensuring that their development has sufficient back-end demand and that their units will sell once complete. Finally, developers with a track record on similar projects are also likely to have accumulated more real estate assets, making them a more attractive guarantor. For first time developers it is crucial to have a skilled and experienced professional team supporting them. This includes contractors, engineers, architects and project managers who have worked on similar projects and are sufficiently experienced to advice their clients.
Financial Position and Credit History:
The financial position and credit history of the borrower is also a crucial point of understanding for prospective lenders. Lenders place a great emphasis on the developer’s current financial position and credit score. The developer’s current financial position is an important consideration as a PG from the borrower will make up an important part of the security package. Borrowers with a strong financial position and a good asset base or income are more likely to satisfy development loan criteria UK lenders use during underwriting. Moreover, lenders will analyse the borrower credit history to ensure that they have a strong track record in repaying loans. Borrowers with a poor credit history are less likely to be able to secure finance than borrowers with a strong credit score and a history of repaying loans on time and in full.
The Asset or Site in Question:
While this may seem obvious, it is one of the most important requirements for property development loans and is carefully assessed by lenders. When the lender provides a facility to the borrower it will be secured primarily against the land or asset that is being developed. With this in mind it is important that the land or property is valued correctly and that it has sufficient value to support the facility. When considering the site, lenders will factor in the site’s liquidity in a forced-sale scenario. This means the lender will need to ensure that the property can be resold to another developer, should the project fail. While it is difficult to assess the liquidity of a part-build development, the lender will use an independent valuer to verify the value of the site, which will assist them in mitigating the risk or resale.
Project-Specific Requirements:
Outside of the factors mentioned above, there are a number of project-specific development finance requirements UK lenders will consider before approving a facility. These requirements can vary, but are likely to include the following:
- Project Timeline: This is an important consideration as it is not ideal for lenders to have their funds tied up in the deal for extended periods of time. Projects with longer horizons will be subject to more intensive underwriting as they pose a greater risk to lenders.
- Borrower’s Equity Contribution: Lenders will heavily scrutinise the borrower equity contribution to the development as it is important that the borrower has sufficient “skin in the game”. Lenders will generally not go above 90%-95%LTC on a development, with the borrower required to make up the balance.
- Planning Approval: Land without planning approval is subject to lower LTVs than land with planning or existing structures on it. Typically, land without planning is unlikely to secure financing over 50% LTV.
- Build Costs: Build costs will also be heavily scrutinised by the lender so it is important that they are in line with national and local averages.
In conclusion, there are a number of different factors to consider when applying for property development finance in order to improve the chances of a successful application. In order to ensure you have full visibility of these factors it is important to ensure that you make use of a skilled development finance broker.
