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How New Build Development Finance Works

Most property developers and construction companies fund their projects externally.  It is comparatively rare for a developer to invest significant sums of their capital in current and planned future projects.

It is only by seeking external funding that developers are able to conduct multiple projects simultaneously, in the pursuit of the best possible returns.  Development finance offers a flexible and affordable short-term funding solution for most types of property development projects.

But how does new build development finance work, given that the property being financed has not yet been built? How do development finance companies confidently issue loans against properties that technically do not exist at the time?

Valuation and Securitisation

All development finance loans are issued on the basis of two key eligibility requirements:

  1. Provision of adequate security to cover the costs of the loan
  2. A viable exit strategy to ensure prompt repayment by an agreed date

Security for commercial loans typically takes the form of some kind of residential or business property; perhaps a development that already exists or an in-progress project of some kind.

With new build development finance there is technically no physical property to secure the facility against. New build development finance loans are issued to cover the entire costs of the development process, from purchasing the land right through to completion of the development.

They are short-term in nature, typically issued over a period of no more than 18 months.  At this point, full repayment is required in the form of a single lumpsum payment.

Naturally, the valuation and securitization process with a project that is yet to get off the ground is much more difficult than with a project or property that already exists. In order for an issuer to lend against such a project, they need to be 100% confident in both its viability and its future value.

This means that the total future value of the property needs to be estimated in advance, calling for meticulously accurate valuations at the hands of skilled surveyors. They need to know exactly how much the development will be worth upon completion of the project, in order to determine how much they are comfortable to provide by way of development finance.

Experience and Expertise

The potential for the completed project to generate income for the developer is one major factor in the decision-making process. The second is establishing the credibility of the individual or organization applying for the loan.

Just because a proposed new build project has potential does not in any way mean it will be successful. For a lender to build the confidence needed to issue against a new build project, they need to see evidence of a successful track record in the field.

This is why development finance only ever tends to be issued to experienced developers with provable expertise. If you have an extensive portfolio of successfully completed projects of a similar nature, your chances of qualifying are high.

By contrast, ambitious newcomers with no experience in the field are less likely to be eligible for development finance.

Bridging Loans for New Build Construction Projects

An alternative to development finance for new build construction projects is bridging finance. The facility works in a similar way – a secured short-term loan, charged at a rate of around 0.5% per month that can be organized at short notice.

However, a bridging loan will almost always need to be secured against assets of the value of a tangible nature. For example, the home you live in, a business property, business equipment, or valuable personal possessions.

It is not typically possible to secure bridging finance against a proposed project, or a new build that is yet to get off the ground.  That said there are some lenders who will gladly lend against such new builds if they are completely confident in their viability and estimated future value.

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