How expensive is development finance?

In today’s world smaller property developers are still shunned by their banks who have little appetite for the sector. Many alternative providers do not seem to have a great appetite for out of the ground funding either preferring  vanilla bridging or if they do entertain true development will be limited to one or two houses.

What development funding available is perceived as expensive and yes compared to bank of England base rates, your home mortgage or even a commercial mortgage it is. However it is important to understand two important factors when evaluating the cost of development funding. .

Firstly a mortgage is a long term facility with capital and interest repayments over years or even decades whilst development finance is a short term interest only loan, usually 12 months or less, and mostly the interest is “rolled up” or debited to the account then repaid with the capital sum on exit. In other words they do not have to fund the loan from their own pockets.

Secondly, unlike your own house, property development is a business whose aim is to generate a profit or return on the developer’s capital and therefore should be treated as such.

Understandably no-one wants to pay more than they have to for finance but the objective is to make an adequate profit and provided the scheme does that then objectives have been achieved.

I had a mature conversation recently with a developer. When we plugged in our numbers they realised that the difference between our proposal and their initial appraisal assuming bank funding would have been around £20,000 not an insignificant amount you may argue. In reality their profit is still £150,000, on an initial investment of around £200,000 and a 9 month project, and so proceeding made business sense. After all there aren’t many business that can return over 100% on investment within a year.

Alternatively, like another developer I recently spoke to, they could have said no, we are not going to pay those rates and declined the development opportunity. The cost of this decision could be huge because in addition to the current scheme profit they would also be forsaking on-going profits from re-investing those profits into future developments right up until such time as their bank decided it was time to lend again, assuming they were still in business!

Which reminds me of the saying “the most expensive money is no money!”

If you would prefer 80% of something over 100% of nothing call us now on 07789 907075 or contact us