Understanding Development Finance


A Comprehensive Guide with Kevin from Ascot Mortgages .

Development finance plays a pivotal role in the world of property investment, offering investors the means to undertake substantial projects and make their mark in the property market.

In this informative blog post, we sit down with Kevin, a director at Ascot Mortgages & Ascot Bridging Finance, to demystify the intricacies of development finance and gain valuable insights for both seasoned investors and aspiring developers.

Ascot Mortgages; A Trusted Partner in Property Investment

Ascot Mortgages have been operating in the investment property lending sector for over 15 years. With the addition of its sister company, Ascot Bridging, their extensive experience, and commitment to excellence, they have become a trusted name in the industry. Kevin emphasises their focus on offering high-level insights into how development finance functions, rather than just dumping knowledge on their clients.

Demystifying Development Terminologies

One of the initial hurdles in the property development landscape is navigating through complex terminologies. Even experienced professionals can get tripped up by terms like ‘light refurbishments,’ ‘heavy refurbishments,’ and ‘semi-commercial opportunities.’ Kevin highlights the importance of clarity in understanding these terms, emphasising that true development begins with acquiring land and culminates in the construction of a building.

Decoding Development Finance Structure

At the core of development finance lies the structure of the loan. Here’s a simplified breakdown:

  • Initial Land/Property Value: This represents the starting value of the land or property earmarked for development. Let’s consider an example where the initial value is £250,000.
  • Build Costs: These are the expenses associated with the property’s development. In our scenario, this amounts to £300,000.
  • End GDV (Gross Development Value): This figure estimates the property’s value after development.
Lenders typically offer loan amounts based on both the initial property value and the end GDV. Most development lenders are inclined to lend between 65-70% of both these figures. If everything aligns well, you could secure a 65% day-one loan-to-value loan.

Why Ascot Mortgages Stands Out

Ascot Mortgages distinguishes itself in the property finance market due to its commitment to customer-centricity. As a family-run business, they prioritise their clients’ needs and satisfaction. Their comprehensive range of services covers everything from residential mortgages to bridging finance, commercial lending, and development finance. The establishment of Ascot Bridging aimed to eliminate the issues they observed in the bridge and development sector, ensuring a seamless experience for their clients from start to finish.

Key Takeaways for Aspiring Developers

  • Understand the Terminologies: Before diving into a project, take the time to familiarize yourself with industry jargon. What you consider ‘development’ may differ from a lender’s perspective.
  • Know the Structure: Gain clarity about the financial structure, differentiating between the initial loan value and the end GDV.
  • Be Prepared: Development projects, like all investments, come with their share of challenges. Being well-prepared can help mitigate potential hurdles.

The Intricacies of Development Deals and Quantity Surveyors

Venturing into property development entails a deep understanding of the processes involved, particularly valuation and the role of quantity surveyors.

Let’s delve into this crucial aspect of development finance:

The Initial Stages
In any development project, ensuring that your projected figures align with reality is vital. A successful valuation triggers the lender to instruct their quantity surveyor, who then conducts an initial report, a prerequisite for finalizing the deal.

But it’s not just about numbers. Quantity surveyors delve into the minutiae, from assessing the quality of your professional team to scrutinizing your contracts. These comprehensive reports leave no stone unturned.

After the approval of financing, the surveyor’s primary role shifts to evaluating whether the project progresses as planned and whether funds are utilised correctly. Frequent visits by the surveyor might seem tempting, but each visit comes with associated costs. A balanced approach, such as monthly or bi-monthly visits, can be more efficient and cost-effective.

The Cost Factor

  • Entering a development deal can be more expensive than expected. Beyond the property’s purchase price, consider additional costs:
  • Stamp Duty: The stamp duty varies depending on the property type, such as commercial properties or land.
  • Legal Fees: Prepare to cover not just your legal fees but also those of the lender.
  • Professional Fees: Engaging professionals like architects and structural engineers incur additional costs.
  • Unexpected Expenses: Always maintain a contingency fund for unforeseen costs. It’s better to be over-prepared than caught off guard.
  • Initial Funding: Lenders often release funds in arrears, so having sufficient initial funds is crucial for smooth project progress.

Valuation – How Does it Work?

Valuers, when involved in development deals, often employ a residual valuation method. This approach aims to determine the property’s worth at any given moment, especially if the lender needs to take possession. The focus is on ascertaining what potential investors would pay for the property. For instance, if you have land with house-building permissions, investors interested in building and either selling or refinancing would be the primary market.

Embarking on property development is both thrilling and intricate. Understanding processes, especially those involving quantity surveyors and valuation, can smoothen your journey and enhance profitability. Knowledge is power, and in development deals, it’s also the key to success.

The Importance of a Financial Buffer

Kevin underscores the necessity of having a financial buffer of approximately 10% of the project costs. This figure isn’t arbitrary; it’s based on experience and aligns with what lenders expect. Operating with precisely the calculated amount without a buffer can raise concerns. In the unpredictable world of development, unexpected challenges and cost escalations can occur rapidly. It’s always wiser to have a financial cushion to fall back on.

Additionally, ensure you grasp planning permissions and building regulations thoroughly. Do you possess the necessary permissions? Are there conditions attached that might impact costs or project feasibility? Understanding your local property market is vital too. What are completed properties worth in the area? How long do they stay on the market? Such insights can make your project more attractive to lenders.

Lastly, but critically, have an exit strategy in place. How will you repay the loan at the term’s end? Will you sell the property or refinance? This crucial information is something lenders will need to know.

In conclusion, while securing a bridging or development loan may seem complex, with proper preparation and a professional team, it can become a straightforward process. The key is understanding all variables, being prepared, and maintaining open communication with all involved parties. Always seek professional advice and collaborate with reputable experts in the field. Best of luck with your development projects!

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