Most developers lose money on finance long before a brick is laid. This guide draws on insight from Brickflow, LandTech's development finance partner, to explain why - not through bad rates, but through poor visibility, taking the first offer from a familiar lender, putting down far more equity than the deal actually required, and never finding out what the rest of the market would have done.
The development finance market has changed significantly since 2008, and the number of credible lenders is now far larger than most developers realise. This guide explains what development finance is, how the modern lender landscape is structured, and what lenders look for, including how first-time developers can get funded.
Property development finance is a short-term loan used to fund the construction, conversion, or refurbishment of buildings. Once the project is complete, the borrower repays the loan through the sale of the property or via refinance.
The size of the loan is based on four key metrics:
Two ratios come up constantly:
Lenders assess both and lend the lower of the two figures. A generous LTC is worth little if the LTGDV/LTV cap hits first.
Tightening regulation after the 2008 financial crash caused high-street banks to lose their dominance of development lending. Today, challenger and specialist banks consistently outpace the major UK banks in SME lending and hold a majority share of the market.
The big four high-street banks (Barclays, Lloyds, HSBC, and NatWest) still make up a significant part of the market, but they now mostly arrange loans for existing clients or experienced developers, and take a very cautious approach to leverage.
Alongside them sits a large and growing group of alternative lenders: specialist development funds, debt funds, and bridging lenders that have moved into development. This has brought more flexible, more accessible funding, greater appetite on both sides of the deal, and faster execution. If a developer finds the right lender, a deal can close far quicker than the traditional route allows.
More choice is good news. The problem is that development finance options have overwhelmingly poor visibility, and that is a huge challenge in the market.
Many developers and their advisers simply are not aware of the breadth and depth of non-bank lenders that exist, or lack the relationships to reach the decision-makers. Poor transparency, little or no marketing capability, and a resulting lack of brand awareness mean that credible alternative lenders with large, flexible funds get missed.
A wider market brings greater opportunity and greater risk. A lot of new lenders have entered the market in recent years, so it is fair to ask whether they will still be there during/after the next downturn. Before committing to a lender, consider:
There are already examples of lenders taking on too much risk, and others sitting close to the line as competition for deals intensifies. If prices fall in a downturn, some lenders will disappear, with serious repercussions for developers who have put life savings into a scheme. Working with trusted lenders is essential.
Borrowing from a big UK bank is not automatically the most viable route. Rates are typically low, but deposits are big, which often means paying away profit shares to investors or limiting yourself to smaller sites.
Working with tech-enabled brokers that have the right expertise, knowledge, and relationships to navigate the market is the surest way to land the right lender and the right structure for a build.
Starting out in property development is not an easy game. Development lending is by far the riskiest of all property loans for lenders, despite the potentially big returns, so borrowing opportunities can be difficult to secure. Experience is key, but without finance you cannot accrue experience.
Here is how lenders actually assess it.
Managing a development has multiple strands, and different skills are needed at each stage. Being a champion builder or a seasoned QS does not automatically make someone a good developer. It is rare to be strong at all three key skills:
That is exactly why the majority of development deals involve more than one stakeholder. A developer with a DM or PM background can usually manage a scheme to delivery, but is less likely to have the same follow-through on planning or sales.
Lenders like lending to experienced developers. It normally takes three relevant schemes to be classed as experienced. Most lenders accept that previous projects will have been smaller in size and value as a developer builds up, but relevance is what counts.
Related industry experience counts for a lot. Builders, QSs, architects, PMs and DMs who have worked on or managed multiple development schemes for other developers can use that to build their case.
If you feel you do not have enough relevant experience, a lender is likely to agree. Bringing in outside expertise is often the fastest route to a first deal.
Development works best as a collaborative effort. An established estate agent will be expert at sourcing the best sites at the best price. Someone with a long planning background will know how to maximise a planning application. Developers need to be honest about their strengths and weaknesses so they can identify where to bring in help.
Lenders favour partnerships where stakeholders are strategically aligned. If a developer buys a site but lacks the build experience to secure funding, bringing in a PM as a contractor can solve it. The PM might take a percentage share of the scheme, or qualify for backend bonuses paid only on delivering on time and on budget, which keeps everyone pointed the same way and makes for a happy lender.
Development finance is not one product from one type of lender. It is a fragmented market of banks, challenger banks, debt funds, and specialist lenders, all calculating the same deal differently. Your job is not to find a lender. It is to see the whole market, then choose the right one.
If you are starting out, be honest about which of the three core skills you have, and structure your team and your stakeholders to cover the rest before you approach a lender.
Ready to see what the market could offer you? Compare development finance lenders with Brickflow, built directly into LandInsight.
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