Property development is an endeavour which is as unpredictable as it is exciting. But we didn’t need to tell you that, right? There are opportunities to learn, to grow, to fail and to bounce back, for sure, but most importantly, property development represents a chance to make some serious stacks. However, before you jump in, you must have the necessary property financing in place. A rare case of ‘accumulate before you speculate’, perhaps?
Whether you are a developer with many years of experience or a newbie about to embark on your first project, funding will always be crucial to the success or failure of your development.
Fortunately, there are several methods you can employ to get the property development funding you need to both start and complete your next venture. With that in mind, here are some common property development funding ideas for your next project.
Traditional Bank Financing
One of the most common ways to fund property development projects in the UK is through traditional bank financing. Banks offer loans specifically tailored for property development, such as development finance or commercial mortgages (more of that in a moment).
These loans typically require a deposit, feasibility studies, business plans, and collateral. Interest rates and terms vary depending on the lender and the project’s risk profile.
Commercial Mortgages
You can use a commercial mortgage to buy commercial property such as shops, offices and industrial units — essentially anything that isn’t a residential property. Like private mortgages, they help you spread the cost of a significant purchase over several years. However, if you want to develop a residential property or you need extra funding to renovate a commercial property, you’ll need to explore other, more suitable options.
The most straightforward commercial mortgages are taken out by existing organisations that want to buy the premises where the business already operates. These are the ones most likely to succeed in the application process as the groundwork is already laid.
Typically, the borrower is a business rather than an individual. The type of business, its financial health, and the nature of the property all play crucial roles in determining the mortgage’s terms, including the interest rates. It’s essential, then, to calculate the commercial mortgage rates you’ll pay well in advance of application, to ensure your business can swallow the cost.
Part Exchange (PX)
Part-exchange schemes (PX) are an ideal solution for property developers, as they offer a way for customers to sell their current property and move into a new one as swiftly as possible. A PX enables you to avoid unwanted expenses or delays that occur during conventional house sales, such as agency fees and broken property chains.
Part exchange lets you grow your business and keep your customers satisfied. If you need a quick, hassle-free sale to fund a development, property financing with a PX may well be the best solution. Do be aware that you may not generate the same amount on a sale as you would a standard deal on your property, but the swiftness and lack of bureaucracy makes this an appealing option for some.
Buy-To-Let Mortgages
Buy-to-let mortgages can be an ideal solution if you intend to buy, refurbish and rent out a property for several years. Much like residential mortgages, your income will determine whether or not you qualify for a buy-to-let mortgage and how much you can borrow. This type of mortgage also restricts you to a single property.
If you want to begin a project involving several properties, you will need to look at alternative funding solutions. While these mortgages aren’t ideal for a property in need of substantial development, they can prove fantastic for getting a foot on the development ladder.
Bridging Loans
Bridging loans are short-term loans designed to bridge the gap between the purchase of a property and the sale or refinancing of that property. They can be an effective funding solution when quick access to capital is needed. Bridging loans usually have higher interest rates and fees compared to traditional bank financing but offer greater flexibility and faster approval processes.
Joint Ventures
Entering into a joint venture (JV) partnership can be an attractive option for property developers looking to pool resources and share risks. In a JV, two or more parties contribute capital, skills, or assets to a property development project. Each party shares in the profits or losses according to their agreed-upon percentage. JVs can be formed with individuals, companies, or institutional investors.
Crowdfunding
Crowdfunding has gained popularity as an alternative funding method for property development projects. Through online platforms, developers can raise funds from a large number of individual investors who contribute smaller amounts. Crowdfunding offers access to a wider investor base and can be particularly useful for smaller-scale projects. However, it is important to comply with regulatory requirements and ensure transparency in project details to attract potential investors.
Development Finance Institutions (DFIs)
Development finance institutions are specialised lenders that provide funding for property development projects, especially those with a social or economic impact. DFIs offer long-term loans, grants, or equity investments to support sustainable development initiatives. In the UK, examples of DFIs include Homes England, who aim to promote affordable housing and urban regeneration.
Mezzanine Financing
Mezzanine financing fills the gap between the developer’s equity and the senior debt provided by banks. It is a hybrid form of financing that combines elements of debt and equity. Mezzanine lenders provide capital in exchange for higher interest rates and an option to convert their loan into equity if certain conditions are met. This type of funding can be useful when traditional bank financing falls short.
Government Support Schemes
The UK government offers various support schemes to encourage property development and address specific housing needs. Right now, the Levelling Up Home Building Fund aims to do just this. Additionally, local authorities may offer grants or loans for regeneration projects in specific areas.
Guranteed Purchase
If you need to sell a home for property development funding, and you need to do so quickly, your best bet could be a guaranteed purchase service. This not only speeds the process up, but it also removes a lot of the hassle of a conventional sale on the housing market. Companies that provide this type of service employ property specialists who help sellers who are either struggling to sell their home or need to do so fast.
You’ll get a guaranteed offer (regardless of the property’s condition), and you’ll save time (otherwise spent marketing the property and negotiating on price) and money (in solicitor’s fees, surveys and more). When property financing, a loss or delay can derail a project and have a severe impact on your reputation as a developer, so speed and certainty are vital.