Broker opportunities in residential development finance

In the main, smaller developers do not match the minimum criteria of the high street and challenger banks. This leaves alternative lending sources, often bridging companies, to fill the gap.

‘developers are serial borrowers’

First, what is a smaller developer? Probably someone building more than five units per year but less than 25. In money talk, annual turnover between £1m and £5m. Residential development finance is an attractive opportunity for brokers, because, having satisfied the developer’s first loan requirement, the next will be in the pipeline within a very short space of time: developers are serial borrowers.

Very often, larger lenders are put off by the borrower’s apparent lack of experience but good on-site knowledge, supplemented by appropriate professional support, often enables the small builder to successfully undertake these projects. After all, a developer is someone with relevant skills, in-house or nearby, with strong organisational ability.

Capital requirements

But how much capital does a developer need and how much can be borrowed? A starting point is say equity of 20% of the total cost and a loan for the remainder, providing the total loan remains within 60% – 65% of the projected sales revenue or Gross Development Value (GDV) as it is called.

In calculating total cost do not forget to add interest and professional fees to the cost of the site and construction.

To enable the lender to efficiently process an application, the broker needs to assist his client to provide an outline of the project, details of relevant experience and supporting documents. These include the lender’s development finance application form, a simple appraisal and cashflow forecast supported by a copy of the planning permission, plans and elevations and a breakdown of the construction and related costs. There will be more, but each lender will detail what it requires.

Look beyond London

The new homes market in London has levelled off somewhat since Brexit but elsewhere it is at a sustained and steady level – meaning there are plenty of opportunities around for brokers to reach out to residential developers. It is then important to work with a lender who has good financial backing and is seeking to consolidate their position in the market while opportunities abound.

Be under no illusions as to how much effort a broker must put in – it’s not just a case of firing off an email to a list of lenders. You must ensure you understand the deal and can provide an adequately detailed proposal. It is hard work to get the best solution for your clients but when you do, the rewards are great.