Property developers have access to a wide range of finance options for their projects. In case of projects involving ground-up developments, which would involve the land purchase and building cost, property developers may find it preferable to tap the development finance market. For instance, if the cost for a plot of land is £100,000 and building cost is another £500,000, a development finance lender might choose to finance 40 percent of the plot purchase cost and 60 percent of the building cost. This not only reduces the pressure on builder’s finances but also enables him/her to use the personal capital for other exigencies.
However, project specific risk factors determine the funding value and interest rate, which makes development finance a very subjective service. For instance, the builder’s experience and legacy, financial credibility and projections, the size of project, etc., play a role in influencing the lender’s decision. Usually, development finance will last up to the completion of the project (about 18 months) and involve a significant payment of deposit upfront. The deposit rate may range from 35 to 50 percent of the property purchase cost. However, some lenders waive this initial deposit and provide full funding. For instance, GPS Finance provides 100 percent funding irrespective of the credit rating of the property developer. Lenders are also known to provide 100 percent funding in case the borrower already owns the land.
Development finance provides the much-needed lifeline for large projects managed by a professional builder. The interest rates are not standardised for property development finance, and the onus rests with the builder to choose the best lender and negotiate the best rate. Usually, the interest rate may touch up to 6 percent (about 2 to 4 percent higher than banks’) and the interest component is combined in the finance package, so there are no monthly payments. There are also other fee components included in the cost: valuation fees, agreement fees, exit fees, etc.
The growth of reality has helped spurred development financing as an alternative to traditional financing. Development financing is constantly evolving with the changing dynamics in the marketplace. In fact, there are specialist consultants who are helping property developers to choose the right finance package for their projects. This has given rise to innovations that add value to development finance services. Today, lenders are adding new product variants in development finance that are a boon to many developers.
- 20 Jun, 2019
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