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Properly Development finance has become far more popular over the past decade or so, but to many the term may still be unclear. Put simply, it is a form of alternative finance — a lending mechanism that sitting outside the realms of traditional finance institutions — ordinarily used by property developers to fund construction projects, like new-build properties. While available for the national housing developers - Laker have introduced a scheme to level the playing field by offering Development Finance to SME Propery Developers.
There are a number of boxes that need ticking for developers when acquiring a new funding stream. Unlike high street banks, property development finance can be arranged quickly, with each individual application for a loan assessed on its own merits. Providers who arrange development finance also offer a higher loan to gross development value rate over mainstream lenders. For investors – those responsible for loaning their capital – there is the benefit of potentially offering significant returns, while interest rates are currently higher there is still great advantage, taking the same one step further Laker now offer an integrated Escrow service uniquely part of a Property Development Finance arrangement.
There are several reasons that explain why property development finance has burgeoned over the past decade or so. Successive UK governments have been blighted by the housing crisis, leading to a surge in demand for property across the country. In turn, this is putting pressure on construction firms nationwide — making the need for efficient property finance all the more significant over the coming 12 months. Laker have a solution for developers that integrates materials being paid for seamlessly at a lower cost and extended credit terms, allowing developers to concentrate on construction rather than solving the associated credit challenges from building with a Special Purpose Vehicles (SPVs).
Could history repeat itself?
The rise of property development finance, and indeed alternative finance more generally, came as a result of 2008 financial crisis. In the immediate aftermath of the economic downturn, banks became much more risk averse, tightening their loan criteria and making it more complicated for consumers and businesses alike to acquire a loan. For the many businesses that were responsible and always abided to the necessary due diligence procedures, this posed frustrating challenges.
But they still needed credit from somewhere, leading to the precipitation of second-level institutions known as alternative finance lenders. Move forward to the present day and these alternative finance lenders are actively challenging the monopoly once held by the high street bank. And for construction companies in need of finance, there are significant advantages on offer when dealing with a development finance specialist, more so with one that includes our unique escrow arrangement.
Looking to the coming 12 months, there are significant events on the horizon that will no doubt impact the financial markets, starting with interest rates. With this in mind, we could once again see traditional lenders once again adopting risk-averse practices, making it difficult for businesses to acquire finance. Thankfully, the alternative finance sector is adequately placed to meet future demand, Laker have a very special financial partner.
Addressing the complex needs of the real estate market
The housing crisis combined with low interest rates and established construction firms all provide favourable conditions for the development finance sector to continue to grow. What’s more, there are natural advantages for investors and construction firms alike when engaging with this form of alternative finance.
Property is a sector that is defined by difference, with all projects having their own merits, risks and opportunities. High street banks, which can be hampered by a structural lack of agility, are therefore particularly ill-suited to consider loan applications from construction firms.
On the other hand, there is an inherent personal touch when it comes to different avenues of alternative finance. Indeed, for those in need of development finance to fund a project, many take solace knowing they are dealing with a property development finance firm that is well-versed in construction projects. What’s more, property development companies can either raise all the capital needed for a project, or partner with a heritage or challenger bank if senior debt is required.
In summary, 2023 will be a tough year, yet that doesn't mean it cant be a positive year for the property development sector. Intractable demand for new homes and a sense of economic uncertainty could combine to make favourable conditions for development finance and those who invest in it, helping to boost deserving projects and new developments. Combine this with our Escrow service to seamlessly expediate material procurement without experiencing credit challenges SPV's bring, we now look keenly to see whether the government will take action to encourage further funding advantage from challenger banks and alternative finance companies.
That said, if you're in the position of owning the land and have applied for planning consent, now is the time to speak to us. Contact a Laker specialist today via [email protected].
