Property Development can be a long winded, complex affair. First you need to find a suitable site if you are planning a new build development, or building if you are redeveloping. Then you need to jump through all the hoops required to get planning permission, from the design and construction specification, to the utilities/services and community impact planning. These two parts of the process alone can take years.
Once planning permission has been granted a developer has to secure the right contractors and work through all the legalities and paperwork from insurance to agreed targets. Only then does work actually start on the building process, and this can be subject to multiple delays along the way waiting for trades to attend or materials to be delivered to site. It’s likely that as soon as the development is starting to take shape the property or properties can begin to be marketed, but as anyone who has ever bought or sold a property knows, the time taken to find a buyer and complete a sale is entirely unpredictable.
From all this it is easy to appreciate that property developers are often working with a range of moveable target dates, and this is in turn often the main source of concern and stress for them when it comes to financing.
How does financing work in the unpredictable world of property development?
Good quality property developers often form strong relationships with their financing partners. This is because once a trusting relationship has been built it can provide dividends to all parties involved. During the course of a development the financing needs change fairly dramatically, so having a good relationship with those in charge of your funding sources is essential to making this as stress-free and frictionless as possible.
At the start of a project the main security for any lending required will be the proposed development site. In some cases the intrinsic value of this may be fairly high, particularly if the land is in a good position and if there is a useable building or buildings in place. It could also be, however, just an empty space of wasteland with little value. At this stage a developer is likely to be seeking what is known as bridging finance, so called because it is used to bridge the gap between the initial stages of planning a project when the land asset’s value can be low, to the start of actually commencing it when the land asset’s value may have changed.
PDL Bridge products help get property developments off to a great start
Property Development Loans (PDLs) deliver flexibility and certainty during this time of variable financing need. At this initial stage whilst developers are purchasing the site, designing the development and seeking planning permission, right up to the point of starting the work, a ‘PDL Bridge’ is used.
PDL Bridge products can have term lengths between 6 months and 30 months, or even slightly longer. The amount lent is generally fairly low, from between £200,000 to £750,000. The maximum loan-to-value can be in the region of 85% but this is because it is secured against a site based on its actual, pre-development value, and so it is deemed slightly lower risk than a site where construction work has begun.
In line with this the returns for PDL Bridge investors, whilst still in the double digits, is not as high as other PDL products.
What about during the construction process?
Once a property development gets going and the builders move in to do their work the financing needs can change again.
Where bridge finance is all about creating some certainty whilst everything needed for a project is put in place, development finance is about making sure funds are exactly where they need to be as building progress is made. At this point developers need a financing partner which is able and willing to lend not only against the current value of the site but against the predicted value once the project has been completed. Of the three stages this has the additional risk of construction and future sale value.
During the construction process PDL Develop products provide the support needed
PDL Develop products are offered to developers who are about to start, or have only just started, construction. The maximum loan to value is calculated based on the final value of the project (Loan to Gross Development Value) and this is why it is lower than a PDL Bridge, typically in the region of 75%. As the project progresses the risk, theoretically, decreases in line with the rising value of what has been achieved on site.
Typical amounts lent are again in the £200,000 to £750,000 range, and as with all PDLs they are used as mezzanine finance to top-up lending from a senior lender. These products offer investors a higher interest rate to reflect the higher risk they are taking on.
What happens towards the end of a project?
Anyone who has ever undertaken any kind of building project will know that the last few weeks or months of a project can be the trickiest and most frustrating part. This is the time when any delays that have occurred earlier in the build start to really catch up with the project and any slippage in the predicted end date becomes harder to control. It can also be a time when getting people on site to finish jobs can become harder and choreographing different trades who are all trying to work around each other can be extremely difficult.
At the same time, for any property developer whose mantra is inevitably ‘time is money’, earlier financing arrangements may start to look less appealing at this stage. Higher rates of interest on borrowing that is still being repaid make less sense when a project is almost complete and the value of the underlying security is therefore much stronger. Hence why many developers, whose projects are coming to an end or which might be slightly overrunning, often look around for more favourable refinancing.
PDL Exits take developers over the line
This is where the PDL Exit comes in. This type of lending is designed to help developers through the last weeks or months of a project, and the terms reflect the comparatively lower risk.
From an investor’s perspective this means that the interest rate, whilst still attractive (often in the teens) is lower than a PDL Develop investment. The term is also shorter to reflect the fact that the project is almost complete. Whilst still typically in the region of 75% Loan to Gross Development Value a loan can be up to £750k because the intrinsic value of the development site against which it is secured is obviously much higher – the nearly complete properties are worth more than the starting site.
PDL investors can accompany property developers along the way for an entire project
PDLs were originally conceived by Crowdstacker because of the interest shown by our investors in investing in property. As our relationships with the senior lenders, brokers and developers which we work with has progressed, we decided to create different products to accommodate the variety of financing needs throughout the entire life span of a property development project.
In this way investors can choose which parts of property development they are most comfortable investing in or to achieve a better balance of risk in their property investment portfolio to suit their own specific needs.
Your capital is at risk if you lend to businesses. Lending through Crowdstacker is not covered by the Financial Services Compensation Scheme. Tax treatment is dependent on an individual. For more information please see our full risk warning. Crowdstacker Ltd. is authorised and regulated by the Financial Conduct Authority (frn. 648742).