Category Archives: Property development funding

Property development funding

The government like many builders and property developers is keen to get Britain building again and has identified a number of large development sites that have stalled simply because of a lack of suitable speculative property development funding. The government is looking to provide some of this much needed funding although the details have not been fully released. The funding shortage will be either in the form of primary funding the usually standard type of development funding currently available on the majority of site at around 55-65% of the loan to value. The second and less secure type is mezzanine funding this is a secondary and more complex type of development funding. It sits on top of the primary development funding and tops up the short fall usually taking care of the percentage difference between the maximum loan to value and a shortfall on the primary development. It is sometimes used to take care of the cash gap between paying the main contractors JCT stage valuations and the sales of the properties. Mezzanine funding often makes the difference between a development taking place and simply not being built out. However this type of development funding is considered risky for the investor as well as being an expensive solution for the site developer. The typical charges are between 25-40% of the investment required and this is usually the first monies to be realised after the primary development funding has been repaid from the sales of the properties. The developer who borrows the mezzanine funding usually also picks up all the soft costs like legal contracts and the mezzanine funder may ask for a directorship or other control of a SPV or special purpose vehicle or limited company used to run the development. It can also be beneficial to the developer because often mezzanine funder will have extensive property development experience and be able to give advice on contractors and with build specifications and off plan sales.

Ready to get building in spring?

Many property developers and home owners like to get their projects set up ready to start the building or construction phase early in the New Year. So this time of year is a good time to make sure that you have all the necessary documentation and your building contractors in place. Good building contractors get booked up so it’s a good idea to get the build costs agreed and a start date confirmed. You will also need to make sure you have ironed out all the planning conditions any issues with building control as well as other items that need to be ready before you start your building project. If the building project is a new build or a commercial property you will need to make sure that you put in an F10 form and appoint a competent person to look after your heath and safety responsibilities. You will also need to make sure you have an asbestos report from a suitable asbestos surveyor. There are other items that need to be organised prior to you starting the building works these range from ordering items with long lead times like bespoke stonework of specialist lintels and bespoke windows. Through to organising statutory supplies like gas and electric and checking any requirements under the UK building regulations and if your project will fall under certain statutory requirements like disabled access and fire regulations. The key to a successful and stress free project is to employ good competent professionals like architects surveyors and an experienced and competent building main contractor. As with most things in life cheap is not always the best, good professionals and building contractors can save you thousands of pounds by finding the most cost effective solutions for items like drainage, fire safety and specialist acoustics and other mechanical and electrical solutions. They can also find the best solutions to structural issues saving money on unnecessary steel works. This skill only comes from their experience on other building and construction projects. Good construction professionals will also have a lot of contacts within the industry and may be able to reduce your finance costs and other costs by recommending other industry experts and professionals. They may be able to put you in contact with a good planning consultant or a general practice surveyor these could save you thousands of pounds on issues like party walls and planning conditions. They can often spot issues that you may have missed that may only become issues once your property development is complete and at this stage it could cost you a lot more to overcome.

Raising a roof

Many home owner look at doing a loft conversion but some properties are less suited to a loft conversion than others. This can often be the case with some bungalows either the pitch is simply to shallow or the ridge of the roof is too low. Even if you can stand up in your loft and the head height is a little tight with the addition of loft insulation bringing the ceilings down and an increase in the thickness of the floor joists it can still be unachievable to convert the loft. However it can still be the best value project for that property so what is the answer? You need to raise the roof this can be done by simply taking the roof off and replacing it with a roof with a stepper pitch and an increased ridge height and therefore more standing room. Or staying with the same pitch and increasing the wall heights to move the whole structure up and give more height or a combination of the two. This usually gives rise to the need for structural steels in the ridge to give the roof more strength and allow for the removal of trusses or other supporting timbers or masonry columns. It will also be likely that you will require steels in to support the new floor structure. This has the advantage of reducing the spans that the floor joists have to make meaning that their depth can be reduced and this again helps with head height. It also makes it easier to get workable stairs and there are various building regulations relating to the depths of the stair risers and the length of stair treads. It is also important to maintain the stairwell ceiling height which is made easier to achieve when these works have been included in the conversion. This does mean more materials and extra work and labour charges but can be well worth while in certain properties particularly those that are set in areas that has high re-sale prices. If you can turn a standard small three bedroom bungalow into a two story house the value of the property can increases dramatically. With all the space down stairs now being able to be utilised as living space you get the added bonus of a large property down stairs. Although this type of building project is too ambitious for most home owners done by the right building contractor they create some amazing houses that command a premium price.

Speculative property development funding available?

This area of bank lending has been one of the least favoured sectors of bank funding in recent years as banks have looked to repair their battered balance sheets and reduce their exposure to property backed lending. A recent survey of European Property Finance trends has seen lenders surveyed increase their likelihood to lend. With three quarters reporting they expect to finance some form of speculative development funding in the next five year period. As always those with the best track records, prime sites and pre-let or sold developments would be their favoured lending targets. Ultimately the banks know that speculative property development can deliver stellar profit gains that allow for developers to pass some of the gross development margin back to their bank financers. So as always in this stage in the property cycle the banks return in search of profits and gentle ease back into an area of the economy that has proven to provide good returns for savvy developers and bankers over many years. It is the speed at which bankers and investors can enjoy their profits and returns, with most speculative building development projects taking between a year and two years to complete. It means that banks and investors can enjoy returns well into double figures quickly with the advantage of a first or second charge of security over a valuable asset. Will this change in attitude now make it easier for builders and property developers to obtain speculative development funding as well as kick starting the property and construction industries?

Changes to planning laws for home extensions

The government plans to let home owners and some business extensions and developments be allow to be built without the need, expense and delays caused by planning permission. The government has gone further as they look to relax the need for social housing on residential development sites. This used to be called a 106 agreement and this could have a profound effect on many new residential developments. It will not only make some residential developments more profitable and therefore more likely to get built. It will also make them easier for speculative development funders to finance. The new planning guidance for home extensions could allow some home owners to build home extensions up to 8m long without the need for planning permission. The new guidance will allow all home owners to build home extensions up to 6m long without planning the current rules only go up to 3m. The 3m rule makes it difficult to add a good sized separate room with the change it will be easy for home owners to add a larger kitchen dinner or family room. They have also announced a raft of other measures designed to kick start the construction industry. This is great news for home owners, the construction industry and the wider economy. It has long been known that money spent on construction has a huge impact on economic recovery so these measures are good news for everyone in the UK. The measures are said to only run for three years so those looking to add a home extension should get the ball rolling before the new planning rules are altered. With home extensions starting from as little as fifteen thousand pounds and now with the added savings of planning fees. Home owners will be able to stretch their home extensions budgets that little bit further to make sure that they can add extra features like bi-folding doors and other contemporary home extension designs.

Main contractors for new build developments

With the current drought in development funding banks and other speculative development funding lenders and brokers are advising that sites be completed as a single phase. In the past it has been possible for smaller developers to build out individual plots or stage developments over one or two plots to improve cash flow through the build stage of a development process. However as banks and other development finance lenders look to mitigate their risk and get their funds back quicker they are increasingly looking to build out whole sites rather than staging the project. They often look for a single main contractor to be signed up under a JCT or similar building contract to ensure the build is carried out quickly and efficiently to achieve end sales and the return of their funds. It does make a build easier and often more cost effective as a composite price for the development is often a good way to reduce build costs, risk and ultimately increase development profit. With the world of construction slowly awaking from its slumbers of the previous few years when new build rates have fallen to record lows. The main contractors are looking forward to dusting off the pricing software and hitting tender deadlines. The advantage of a JCT contract with a building main contractor is that it allows for cost certainty with a fix time scale and pre agreed programme for the build stage of the development. These days many main contractors package up the various elements of the build and subcontract these elements or packages to specialist contractors. So the foundations go to one contractor then the superstructure to another, then roof works and on to the fit out and external finishing. Usually with some of the building main contractors staff supervising the build either as site or working foreman depending on the size and complexity of the building contract. The building contract is awarded after the tender process has been completed. These tenders contain all the working or construction drawings allowance for preliminaries and provisional sums for specification items in the form of pre-contract sums for items like kitchens and bathrooms. These items are then removed from the contract sum on the contract commencement and then added back in after these items and costs are confirmed after the contract is underway.

Tips for successful property development

There are three main cost considerations when you carry out any type of property development from refurbing a small terrace house through to a multi million pound housing estate. The first is the acquisition costs, this is the price you pay for the land or property. The second is the build or construction costs this could be a simple refurbishment budget though to a full construction cost contract. The third is the GDV this stands for gross development value this is the end sale or sale price of the finished project. If any of these figures are incorrect the profit can quickly slip away, the most common mistakes of novice developers is to overestimate the sales prices and underestimate the build costs. If you are buying at auction or even on the open market if you are working on unrealistic sales figures or optimistic build costs your sums will allow you to pay over the odds for the property or development site as other more seasoned developers have been more conservative on sales and have allowed a contingency for the build costs. So the best thing to do is start with a small simple development like a two bedroom terrace house and even if you cannot sell for your desired asking price you can rent the property for a rent that will hopefully cover costs. I have never seen a first time developer buy a large project and it go well, there must be some but particularly when the market is not rising even those with experience can get caught out. In fact many developers have looked at finance costs and availability coupled with challenging sales conditions and have simple decided to shut up shop until they see the market start to move upwards. With this said those that have cash on the hip can get some good bargains with the number of depressed and bank owner land sales. So make sure you buy wisely in areas where you can resell easily and quickly. Get a few quotes from contractors before you commit and do not be lead too much by the estimated GDV or sales figures that the agent who is selling the potential development quotes.

What will happen to house prices?

House prices continue to stumble along with small movements up and down giving neither comfort to the optimists or pessimist. Indeed the same data is often used by both camps with negative data being picked up as continuing pent up demand and the pessimists suggesting that it is because of a lack of demand. If you look at mortgages which have a huge impact on the property and construction sectors you can see both positives and negatives. Mortgages are cheap with low interest rates and good fixed rates available however this is offset by tight lending material. Even though house prices are static it is still an achievement considering the wider economic backdrop. The bank of England has recently continued with its position of low rates and increase quanitive easing with more moves suggested soon to keep inflation on target. But the key is mortgage criteria and money supply when banks have access to cheap money and an increased supply they feel they are in a better position to lend. To increase lending they will relax lending criteria and the upward cycle begins. When lending criteria is relaxed more people can both practically borrow at the same time they have the confidence to borrow. The opposite is currently happening with property buyers and property developers less excited about buying assets that could fall in value while loans become harder to come by. It is interesting that new built homes and developments are seeing price rises against all odds. This is probably due to the recent low build rates in the UK making new homes much rarer than in the boom years of the mid 2000’s when every city’s skyline was peppered with tower cranes. Some economists are now predicting a fifteen percent increase in house prices over the next five years believing that the low supply rates will drive capital values higher.

New build sales increase

The largest volume seller in the UK house building and property development sector has showed a 14 percent rise in sales. The company has also seen the sales prices agreed rising pushing up the gross development value of their sites and in turn the profitability of these sites. Maximising the returns for investors and increasing confidence with their lenders. They have also reported forward sales increasing by over a third. This is further good news for the property and construction sectors, giving work for building contractors, construction professionals and property related businesses. Money that enters the construction industry is known by economists to have a very positive effect on the wider economy. There are still opportunities for investors and speculators to obtain bargain sites and development land as there are still distressed sites coming to the market. Some developers and land owners who entered the down turn with heavily geared borrowings are still in some cases being forced to let sites go well below the levels that they purchased sites or borrowed against them. Construction and building companies that specialise in refurbishments, renovations and building extensions have in some cases seen their market grow. They have however seen more competition in the tender process as companies and building contractors who have been forced out of the new build market have moved into this sector. Like with all businesses those who have a proven and strong track record have weathered the storm and are in a strong position to take advantage as the market conditions improve.

Extending buildings in conservation areas

There are many things to consider when extending any building but when you are considering extending a period property it adds another layer of complexity and design to your extension project. Period property extensions can look fabulous but if the material choices and attention to finishing details are not well thought through the end result can be a poor addition to the original building. This is why buildings that are in conservation areas or listed require input from the local authority conservation department. Conservation officers will have the final say on your proposed plans and material choices, and the detail particularly on external finishes can be very detailed. They will not just settle for a specification of white paint they may want the exact colour and even how much sheen or lime content the paint specification contains. The other challenge with conversions or alterations to period properties is the desires of the conversation officer to retain original features and external details. When this is coupled with the building control officers need to bring a period property up to modern building regulations for thermal efficiency and means of escape this can cause an impasse between the two. Experienced property developers will know how to negotiate between conservation officer and the building control officer. The key is to find a good building contractor who has experience in the type of building project you are undertaking. Because many period properties by their very nature are located in and around small town centres and villages many are a mixed use of commercial, retail, offices and residential. This again adds a further level of regulative burden to the project and again it is important to find a capable building contractor how knows their way around the various statutory requirements of this type of property development.