by David Khan | Jan 10, 2024 | Advice
Embarking on a development project is a multifaceted journey that requires careful planning, strategic thinking, and, perhaps most importantly, the right financing structure. The financial blueprint of your project plays a pivotal role in its success or failure. In this article, we’ll explore key considerations to help you determine the optimal financing structure for your development project.
- Project Scope and Scale: Before delving into financing options, it’s crucial to have a clear understanding of the scope and scale of your development project. Different projects, whether residential or commercial, come with distinct financial requirements. Ensure that the financing structure you choose aligns with the size and complexity of your endeavour.
- Risk Assessment: Assessing risk is an integral part of any development project. Understand the potential risks associated with your project and evaluate your risk tolerance. High-risk projects may require more robust financial backing or alternative financing structures. Striking the right balance between risk and return is essential for the long-term success of your venture.
- Timeline Considerations: Development projects often operate on tight timelines. Consider the duration of your project and whether you need short-term or long-term financing. Bridging loans are a popular option for projects with immediate funding needs and can provide a financial bridge until more stable, long-term financing is However, if you know you will need development funding, it’s best to secure that before entering a bridge loan where the exit is unknown.
- Cost Breakdown: Break down the costs of your development project into distinct phases, such as land acquisition, construction, and marketing. Different financing structures may be better suited to specific phases of your project. Tailoring your financing approach to the unique financial requirements of each stage ensures a smoother financial flow.
- Interest Rates and Terms: Scrutinise the interest rates and terms offered by potential lenders. A financing structure might look appealing at first glance, but the devil is often in the details. Understand the terms of the loan, including interest rates, repayment schedules, and any associated fees. Choose a structure that aligns with your project’s financial capabilities.
- Diversify Funding Sources: Consider diversifying your funding sources to mitigate risk. Relying on a single source of financing can leave your project vulnerable to market fluctuations or changes in the economic landscape. Explore a mix of traditional loans, private financing, and potentially government incentives to create a resilient financial structure.
- Consult Financial Experts: Don’t hesitate to seek advice from financial experts. Engage with financial advisors, accountants, or development finance specialists who can provide insights into the most suitable financing structure for your specific project. Their expertise can help you navigate complexities and make informed decisions.
Choosing the right financing structure for your development project is a critical step in ensuring its success. By carefully considering the project’s scope, assessing risks, and aligning financing with your timeline and cost breakdown, you set the stage for a financially sound venture. Remember, each project is unique, and there is no one-size-fits-all solution. Take the time to explore options, consult with experts, and craft a financing structure that paves the way for your project’s prosperous future.
BLG Your Partner For Tailored Success
In the dynamic arena of development projects, securing the right financing structure is paramount, and BLG Development Finance stands out as a trusted partner offering a versatile range of funding options. From residential development finance, covering land acquisition to construction costs, to specialised solutions for commercial projects and bridging loans addressing time-sensitive needs, BLG’s expertise caters to diverse project demands.
BLG has a 20 years’ track record in the sector lending in both the good time and bad – one key factor in choosing a lender is finding a partner who lends during challenging economic time.
What sets BLG apart is our collaborative, holistic approach working closely with clients to understand project intricacies and deliver personalised financing solutions that seamlessly align with goals and timelines. Choose BLG as your financial collaborator, ensuring a solid foundation for the success of your development project.
by David Khan | Jan 10, 2024 | Advice
In the world of property development, one of the most critical decisions you’ll make is selecting the right property or site for your project. If you’re looking to build a new home, you’re probably on the hunt for newer, better ways to find sites for development. The success of your venture heavily depends on the location and suitability of the site you choose. If you don’t research the area and find out what type of property is in the most demand, then you could end up holding onto a property that simply won’t sell. Here at BLG we explore some top tips on how to find the perfect property and area for development.
Market Research
Before embarking on a search for sites, your expectation will need to be researching many sites before finding a site that works, as there are many sites where development is unviable. Thoroughly investigate the real estate landscape within your intended location. Identify regions with growth prospects, strong demand, and favourable economic conditions. The choice of a promising location can have a substantial impact on the success of your project.
Inadequate research may lead to complications when selling or renting the property. Different areas are better suited to specific types of development. For instance, urban areas often prove conducive to building apartments and one or two-bedroom homes. Prior to breaking ground, it is imperative to conduct comprehensive area research, including an understanding of the property types in demand and their associated average prices. Addressing market gaps increases the likelihood of selling your developments and achieving profitability.
Network & Collaborate
Networking and collaboration are crucial aspects of finding the right property for development. Building relationships with local real estate agents, property developers, and professionals in the industry can open doors to valuable opportunities and resources. Here’s an expanded look at how to network and collaborate effectively:
Connect With Local Real Estate Agents
Local real estate agents are often the first to know about new properties coming onto the market. They can provide you with listings that match your criteria and help you navigate the buying process. Meet with several agents, express your goals, and maintain open communication with them.
Engage With Property Developers
Property developers, especially those with experience in your target market, can offer insights into the best areas for development. They may also have off-market properties or partnership opportunities. Attend industry events, seminars, and conferences to meet and learn from experienced developers.
Attend Real Estate & Development Events
Networking events, real estate expos, and local business gatherings are excellent opportunities to meet potential partners and collaborators. Engage in conversations, share your goals, and be open to learning from others in the field.
Online Platforms & Real Estate Listings
Utilise online resources to search for properties. Websites like Rightmove, Zoopla, and OnTheMarket, as mentioned, can help you find listings in your desired areas. Set up email alerts to receive notifications of new listings that meet your criteria.
Social Media & Forums
Participate in social media groups, forums, and discussion boards related to real estate and property development. These platforms can be a source of valuable information, and you can connect with professionals and enthusiasts who share your interests.
Local Government & Planning Departments
Establish a good working relationship with local government officials and planning departments. They can provide valuable information about zoning changes, future development plans, and potential incentives for your projects.
Visit Potential Sites
Don’t rely solely on online information, visiting potential development sites in person is an essential step in the property search process. When you visit a property in person, you can evaluate its physical condition, which may not always be accurately represented in online listings. Inspect the existing structures, infrastructure, and any potential issues, such as structural damage, mould, or environmental concerns.
Furthermore, being on-site allows you to assess the property’s location more thoroughly. You can gauge the proximity to essential amenities, transportation hubs, schools, parks, and shopping centres. Understanding the neighbourhood and its growth potential is critical for a successful development project. Sometimes, a gut feeling, or local knowledge gained from visiting a site can be invaluable. Your instincts and the information you gather during a visit can help you make a more informed choice.
Auctions
Another great approach to discovering property development prospects involves attending a property auction. It’s often possible to acquire the auction catalogue in advance, allowing you to conduct the necessary research before participating in the auction event. Even if a property appears to be attractively priced, it could potentially be in a problematic area or have unfavourable neighbours, making it challenging to rent or sell in the future.
A variety of property types may be included in the listings, including those ready for immediate development, those in need of renovation or refurbishment, and opportunities for land development. It’s advisable to enter the auction with a predetermined budget in mind and avoid getting caught up in the excitement of the auction atmosphere.
Analyse Costs
Always make sure you evaluate the expenses associated with property acquisition, encompassing the purchase price, legal fees, and potential renovation or development costs. Ensure that the property aligns with your financial plan. Identifying the most lucrative development opportunity is a challenging task, heavily contingent on the location you intend to develop.
When constructing within urban or city centres, you typically have the capacity to charge higher rates per unit, but the development process is likely to incur higher costs. Conversely, suburban homes may have a somewhat lower cost per unit compared to urban areas, but they could yield larger profit margins per unit, ultimately resulting in greater overall profits. Lastly, apartments tend to generate more substantial profits since you can accommodate a greater number of units on the same amount of land, which proves especially advantageous in areas where land availability is limited.
Environmental Considerations
Evaluate any environmental factors that may affect your development, such as contamination, flood risk, planning permissions or natural preservation areas. These factors can significantly impact your project’s feasibility. You need to understand the different types of land, from farmland, industrial, greenbelt or brownfield. What they offer, and their limitations before deciding on making a purchase.
Finance With BLG
Finding the right property is a crucial step in your property development journey. Taking the time to research, evaluate, and select the best property for your project can lead to a more successful and profitable development. BLG are a leading lending specialist in property development finance, who’s expertise, support and guidance can get your projects off the ground successfully. Contact BLG today.
by David Khan | Jan 10, 2024 | Advice
Property development within the UK can be an exciting and lucrative venture, for those seeking to expand their wealth or even establish it as their primary business. Although government regulations, finance updates and unforeseen circumstances such as the pandemic have unquestionably influenced the UK housing market. Creating a somewhat less enticing feeling towards property development than prior years. However, the industry remains a stable long-term investment avenue that can yield substantial returns when executed correctly.
Despite the economic downturn, along with tangible challenges such as material supply chains and costs, as well as difficulties in hiring post-Brexit, there are indicators that the UK property market will persist in growing over the medium term. UK property development still stands as a more dependable option compared to most other sectors.
Although it is crucial to understand the process involved before you embark on your journey. Whether you’re a novice or a seasoned property developer, having a clear understanding of the steps involved can make your project smoother and more successful. This guide aims to provide you with insights into the risks, rewards, and genuine opportunities associated with entering the field of property development.
This property development guide will cover:
- Creating a property development business plan
- Buy-to-let vs buy-to-sell
- Market research
- Calculating ROI/Rental yield
- Renovating for sale or rent
- Financing your property development
- Final thoughts
Property Development Business Plan
To a certain extent all business plans no matter which sector follow a similar structure. Overall, the plan should outline your business objectives and the strategies you’ll employ to achieve them. Begin by defining your goals and objectives for the project. Determine the type of property you want to develop, the target market, and the expected return on investment. Several critical components demand clarity before you embark on any investments.
Start by addressing the following:
- Who is your target market?
- What sort of properties are likely to appeal to your target market?
- How are you going to obtain funding?
- Expected timescales and costs for construction or renovation
There are various property development business plan templates, experts and management software that can help you create your own.
Opting for Building-to-Sell or Building-to-Rent
The next step involves making an informed decision about the specific type of project you want to concentrate on. In order to align with your objectives, thorough research is necessary to determine the most suitable business approach. Build to sell or build to rent. These represent two lucrative property development business models. However, the decision between the two is crucial.
Building to Sell
Under the building-to-sell model, your aim is to construct one or more properties for the purpose of selling them. After successfully completing a project, your focus turns to selling the property for a profit. You may also consider purchasing a substandard property, renovating it to a high standard, and then selling it for a profit. These approaches yield returns through capital gain, typically selling at a higher price than your total construction costs. Many developers using this method transition from property development financing to development exit financing to minimise interest expenses.
Building to Rent
This business model is centred on constructing a property with the intention of renting it out. Building-to-rent aims to establish a consistent, long-term income stream. Depending on your rental agreement, you can expect a fixed, regular income from the property. However, this model necessitates diligent property maintenance to preserve its value. Including arranging for repairs, ensuring that things like the smoke detector and boiler are regularly inspected, and potentially even finding tenants and checking their references and credit scores. It provides extended term returns but may pose challenges in securing funds for your next project.
It’s worth noting that you can transition between different property investment models. For instance, you might decide to sell a property after renting it for several years or use the gains from a buy-and-sell property to venture into a buy-and-hold investment.
Market Research
Before any investments take place, it is vital to conduct thorough financial analysis and gain a clear understanding of the real estate landscape in your chosen area. Familiarise yourself with the preferences of potential buyers or renters in that area and determine your budget for property acquisition. Commencing your property investment journey in a nearby location is often wise due to your familiarity with the local area. However, you might also consider exploring more distant areas to discover which have significant growth potential. Search for regions where properties are in high demand, sell swiftly, and show signs of active construction or investment, as these are promising indicators of an area on the rise.
The Significance of Location
The key is to identify areas just on the verge of becoming popular, where housing prices are poised to rise. Look for locations situated at the outskirts of bustling urban areas or for buy-to-let investments, university cities are a favourable choice. Websites like Rightmove offer easily accessible data on the selling prices of houses in various areas.
Always put yourself in the shoes of your target audience. Accessibility to transportation is crucial, as young professionals and students seek proximity to bars and restaurants, while families prioritise safety and access to quality schools.
Establish connections with local real estate agents who possess insights into the preferences of potential buyers and renters in the area. Regularly check in to cultivate personal relationships that ensure you’re the first to be informed when suitable properties become available.
Financing Your Property Development
Next you need to establish a budget for your project, including acquisition costs, construction expenses, and any other associated costs. Seek financing options and secure the necessary funding. There are various options for property development finance from bridging loans, development finance and mortgages. Here are just 4 options you can start to consider.
- Property Development Finance: Development finance is a type of lending that helps businesses, entrepreneurs, and property developers to access funding for development projects – both residential and commercial. BLG offers both seasoned developers and those just starting, development loans from £1,000,000 to £15,000,000.
- Bridging Loan: Bridging loans are short-term, high-interest loans often used by individuals needing to acquire a property while waiting to sell another. Property developers also favour these loans, using them to purchase, renovate, and subsequently sell properties, repaying the loan and interest in the process. These loans are secured, making them most suitable for those who have property or land that can serve as collateral. A clear exit plan, outlining how the loan will be repaid at the term’s end, is essential. BLG offer property developers loans from £500,000 to £10,000,000 up to 12 months but longer term can be considered.
- Buy-to-Let Mortgage: If your intention is to rent out a property after purchase, you can’t rely on a standard mortgage. Instead, you’ll need a buy-to-let mortgage. These typically come with an interest-only structure, larger deposit requirements, higher interest rates, and increased fees compared to standard mortgages.
- Buy-to-Sell Mortgage: Standard mortgages are not suitable for those looking to buy, renovate, and quickly sell a property. Opt for a buy-to-sell or flexible mortgage, which allows for a shorter holding period. However, this convenience comes at the cost of higher interest rates, elevated fees, and a significantly larger deposit.
Summary
Property development can be an exceptionally profitable and fulfilling pursuit. While it requires dedication, instinct, and skill to excel in it, it’s a field accessible to anyone willing to learn. By following these steps, you can navigate the property development process with confidence and increase your chances of a successful and profitable venture. Keep in mind that each project is unique, and flexibility is essential when adapting to unforeseen challenges.
Securing development finance is a relatively straightforward process. If you’re considering a deeper involvement in this field, our advisors and team at BLG are ready to offer free, no-obligation guidance whenever you require it. Contact us today to find out more.
by David Khan | May 2, 2023 | Latest News
The impact of energy-efficient upgrades on homes has become a topic of increasing interest in recent years. As the world continues to grapple with the challenges of climate change, energy-efficient upgrades have become a crucial tool for reducing energy consumption and greenhouse gas emissions. At the same time, these upgrades can also have a significant impact on the value of a home, with some studies suggesting that energy-efficient homes can command a premium on the housing market.
EPC Ratings
Energy Performance Certificates (EPCs) have become an important part of the housing market in recent years. An EPC rates the energy efficiency of a property on a scale of A to G, with A being the most energy-efficient and G being the least energy-efficient. The certificate also provides recommendations on how to improve the energy efficiency of the property. Properties with higher EPC ratings are more energy-efficient, which means that they are cheaper to operate. Rightmove reported that 47% of landlords say they would not buy a property with an EPC rating below a C in the future.
What Is The Green Premium?
The green premium is the difference in price between an energy-efficient home and a comparable home that is not energy-efficient. In other words, it is the premium that buyers are willing to pay for an energy-efficient home. The concept of the green premium is based on the idea that energy-efficient homes are more valuable than comparable homes that are not energy-efficient, as they are cheaper to operate and more environmentally friendly.
The green premium can be measured in a number of ways. One approach is to compare the sale prices of energy-efficient homes and non-energy-efficient homes in the same neighbourhood or market. Another approach is to estimate the increase in the value of a home that results from energy-efficient upgrades, such as the installation of solar panels or the replacement of windows and doors. A survey by RICS, which involved estate agents, revealed that 41% of them believed that purchasers were displaying a higher level of interest in energy efficiency.
Energy-Efficient Upgrades & House Prices
Investing in energy-efficient upgrades for a home not only reduces the property’s environmental impact but can also lead to significant energy savings, resulting in lower utility bills over time. Houses with upgrades such as heat pumps are typically considered to have a “green” premium due to their energy efficiency and eco-friendly features. Heat pumps are highly efficient and use renewable energy to heat homes, reducing the carbon footprint of a property.
Several studies have examined the impact of energy-efficient upgrades on house prices. These studies have generally found that energy-efficient homes command a premium on the housing market. Santander’s research indicates that individuals are willing to pay a 9.4% premium on residences that have been retrofitted to comply with “energy efficiency standards.” Additionally, estate agents believe that buyers would be willing to pay up to 18% more for such properties. By analysing extensive data, PriceHubble has determined that properties with poor energy efficiency are valued at up to 20% less than their energy-efficient counterparts. According to Rightmove, enhancing a property’s energy efficiency rating from an F to a C could result in a 16% increase in its value.
The reasons for the green premium are straightforward. Energy-efficient homes are cheaper to operate, which means that owners of energy-efficient homes save money on their energy bills. In addition, energy-efficient homes are more environmentally friendly, which is becoming an increasingly important consideration for many homebuyers.
The Impact On The Housing Market
In addition to the impact on house prices, energy-efficient upgrades can also have a broader impact on the housing market. One potential impact is that energy-efficient homes may sell more quickly than comparable homes that are not energy-efficient. This is because buyers may be more attracted to homes that are cheaper to operate and more environmentally friendly. Furthermore, energy-efficient upgrades may lead to an increase in the overall value of the housing market. This is because energy-efficient upgrades can reduce the demand for energy, which in turn can lead to a reduction in the cost of energy. This reduction in the cost of energy can make housing more affordable, which can increase demand for homes and lead to an increase in the overall value of the housing market. As energy-efficient upgrades become more common, builders may begin to incorporate energy-efficient features into new homes as a standard practice. This can lead to an increase in the overall quality of new homes, which can also lead to an increase in the value of the housing market.
Market Shift Concerns
This potential shift in the market poses a significant concern for mortgage lenders and their regulators, who fear a potential “disorderly transition”. Lenders are taking steps to encourage their clients to retrofit their homes by offering various incentives, including cash-back schemes and low-interest loans. Furthermore, government initiatives and financial incentives, such as the Renewable Heat Incentive (RHI) in the UK, are encouraging homeowners to switch to renewable heating systems like heat pumps. These incentives can further increase the green premium of heat pump-fitted homes, making them an attractive investment for homeowners looking to improve their property’s value while minimising their environmental impact.
Chris Brown, chief executive, and founder of Climatise states that “It is essential for the government to play a role in facilitating a smooth shift towards energy-efficient housing. The cost of retrofitting a house to reduce its impact on the environment, through better insulation and replacing a polluting gas boiler with a cleaner and three times more efficient heat pump, cannot be entirely recovered through energy bill savings”.
With looming climate deadlines and carbon budgets running out, the government’s lack of action in this area may only increases the risk of a sudden and dramatic shift in the housing market. As a result, the green premium gap may widen rapidly, emphasising the importance of retrofitting homes to improve energy efficiency and reduce carbon emissions.
by David Khan | Apr 26, 2023 | Advice
As a property developer, you’re likely aware that development projects can be unpredictable, even if you have years of experience under your belt. Unexpected setbacks, such as delays and rising costs, can make it difficult to complete a project on time and repay your initial loan. In some cases, lenders may not be able to offer an extension or forbearance, and you may run out of funds to complete the project if you’re self-financing. Fortunately, developer exit finance can provide a solution to such situations, helping you to save your project and avoid financial losses.
What Is A Development Exit Loan?
The development exit loan serves as a form of bridging finance aimed at supporting developers as their project nears completion. By replacing the current development finance, it lowers finance costs and releases additional equity to aid cash flow or for subsequent projects.
This type of loan is typically used when a developer encounters unforeseen circumstances. For instance, cost overruns, delays, or changes in the market that make it difficult to pay off any outstanding loan on a recently completed or nearly completed property. Instead of abandoning the project or continuing to invest additional funds, the developer can exit the project and recover some or all their investment through a developer exit loan.
The loan is usually secured against the property being developed, and lenders may also require additional collateral to mitigate the higher risks associated with early exits. However, the loan terms can be flexible, allowing the borrower to repay the loan over a shorter or longer period, depending on their needs.
Why Are Development Exit Loans Used?
A developer exit loan can provide additional funding, additional time, or both, to complete a property project with the end goal of exiting the loan and earning a profit. These loans can be useful in situations where the project has experienced setbacks due to unforeseen circumstances, such as insufficient contingency planning, events outside of everyone’s control, or miscalculations.
In the past year, there has been a directionally 50% increase in developer exit loan business. This is primarily due to developers exhausting their own funds and original lenders being unable to extend the loan term if the project is not completed, often due to restrictions imposed by their own funders.
Who Offers Developer Exit Finance?
Developer exit finance is not a widely known financing option since not all property finance lenders offer it. Generally, it is provided by lenders with more diverse and flexible funding lines, allowing them to cater to a broader range of borrower situations. These loans are often offered by lenders with specialised expertise in the development sector, rather than lenders who solely provide bridging loans. This is because the lender needs to possess a deep understanding of how to structure more complicated cases and have the necessary development experience to evaluate the build and help in completing it.
Who Can Use A Development Exit Loan?
A development exit loan is generally provided to developers upon reaching practical completion of a property. This loan option is particularly useful for developers who are faced with unexpected challenges, such as adverse weather conditions, unanticipated expenses, or unforeseen issues that can significantly affect the project’s timeline and budget. In such situations, developers may find it challenging to repay any outstanding loans on the property, and a development exit loan can offer much-needed support. By refinancing the current property development finance and providing additional funds, this loan option can help cover the unexpected expenses and provide relief to the developer. This allows them to successfully repay the loan while minimising the financial risks associated with the unforeseen circumstances.
Can The Property Be Considered Wind And Watertight?
When considering a developer exit loan, one important factor to determine is whether the property in question is wind and watertight. This means it has been constructed to a point where it is resistant to the elements, such as wind and rain. This is typically achieved when the property is sealed against water and air infiltration, and the roof, walls, and windows are properly installed to prevent leaks.
When a property is wind and watertight, obtaining a developer exit loan is a straightforward process with minimal risk. These loans function similarly to standard bridging loans and can be available at similar rates and terms, up to 75% loan-to-value. This is because the property has already been built, and valuations at this stage are typically accurate.
However, if the property is not wind and watertight, the process becomes more complicated, although some lenders can still provide assistance. These cases would typically fall under the lender’s developer funding range and require more customized underwriting and development expertise, but it remains possible to obtain financing.
If your property development has been completed but has yet to be sold, and the repayment of the initial development funding is due, a development exit loan could be a viable option to consider. These loans can help you get your project back on track, by providing additional time to sell the units with a financing structure that is flexible, fast, and cost-effective. The added time can be incredibly valuable in terms of maximizing the returns at the end of the project. With a development exit loan, you can take advantage of the benefits of a longer-term financing arrangement, which is typically easier to manage and comes with lower borrowing costs. This type of loan can help you achieve your project goals while mitigating any financial risks associated with the sale of the property.
