What is Development Finance?

Posted by Alternative Bridging Corporation on 28th October 2022 -

What is development finance?

On the surface, the term ‘development finance’ might seem a straightforward one. Even those unfamiliar with the property market can deduce that this is, at its core, about funding the all-important creation of new buildings. Beneath that blanket definition, though, there are myriad complications and nuances, not least regarding the links, and differences, between this and other forms of bridging finance.

Development Finance Fundamental terms

Development Finance Explained:  For a project to come under the definition of development – rather than refurbishment, for example – there are some clear markers. The first is the scale of the work being done. Development finance funds ground-up works, likely requiring planning permission. This encompasses structural work or large-scale extensions, as well as building entirely new properties on land purchased for this purpose.

As a result of these factors, development finance loans (link to product page) tend to be for larger amounts, and over a longer-term period than, say, a heavy refurbishment bridge.

The exit routes – a key consideration for any bridge – tend to be linked to the final sale of the built property or properties, or moving onto a term buy-to-let (BTL) mortgage for those remaining on as landlords.

Contingency planning for Development Finance

Development finance tends to bring with it a need for even more nuanced analysis than other types of short-term lending. A residential buyer experiencing a chain break, for example, might find it relatively straightforward to access a bridging loan to gain them time and freedom, based on the value of the property and the likelihood of finding a buyer.

When it comes to securing a development finance, loan, however, there are many more factors at play. Whether a ground-up build or a major structural change, the system for gaining planning permission can be difficult to navigate, which can affect timeframes and even stop projects in their tracks. Continued supply chain disruption, in addition to any number of other unforeseen delays, could stretch even the simplest of builds past their projected end date. The potential for a change in demand or property values over the months – or more – it can take to complete a project could affect the developer’s ability to pay back the loan after work is finished.

While there is uncertainty in any type of lending, development projects tend to be much more mutable, necessitating a steady, experienced hand from the outset, and continued assessment as the work moves forward. Contingency planning is a key element of this market.

Experience on all sides

For all of these reasons, development lenders tend to look for borrowers with the experience to weather potential storms. In an ideal world, this means a slew of successful previous projects, but experience might take on other forms as well. For example, a failed project might not be entirely problematic, if there is evidence of good problem solving. Meanwhile, a first-time developer with adjacent experience – such as a history in the construction field – could be a steady prospect for the right lender.

So, there are many moving parts, from the experience of the borrower, to the value of the final result, projected property trends, the exit route, the planning system, and even the weather. All of this makes it increasingly important to work with a lender with extensive experience in this market, and a range of products that can be tailored to suit each unique case.