Development Finance Explained: How Property Businesses Fund Growth

It’s natural for property businesses to reach a point where traditional funding no longer fits their ambitions. Buying completed assets is one route to growth, but development can offer greater control over design, use, and long-term value.

This is where development finance comes into play.

Development finance supports projects involving construction, major works, or substantial changes to a property’s use or structure. That’s why, for property businesses, knowing how this type of funding works is imperative to planning sustainable growth.

When development finance is used

Development finance is used for projects such as new-build properties and commercial to residential conversions. It can also include schemes involving extensive structural work. These are projects where the property might not be habitable or income-producing for a period of time.

Because of this, development finance is assessed differently from standard buy to let and commercial mortgages. Lenders focus on the feasibility of the project, as well as the borrower’s experience and the planned exit they have in place.

This makes development finance a distinct funding option – one made for businesses actively creating or reshaping property assets.

How loans for property development are structured

Loans for property development are short to medium-term in most cases. They’re also released in stages.

An initial advance could cover the land or property purchase, for instance, with further funds drawn down as the build progresses.

It’s common for these drawdowns to be linked to milestones, such as the completion of foundations or structural works. This might have to be verified by a professional monitoring surveyor.

Interest can be paid monthly, this is called a serviced loan, or at the end of the term, which is referred to as a retained interest loan. By paying monthly you can maximise the upper loan limit, as  you are reducing the risk to the lender. However, paying at the end of the term gives you cash-flow flexibility.

Interest costs need to be factored into the overall project budget from the outset.

How development projects are evaluated

When exploring development finance, lenders analyse the overall viability of the scheme instead of simply the property itself. This includes the total cost of the project, along with the anticipated value once works are complete, and whether the figures stack up in the current market.

The borrower’s experience is also accounted for, particularly on more complex developments. Clear plans, realistic timescales, a well-defined exit – these are all a must. They demonstrate that the project has been thought through properly.

Keep in mind that pricing is influenced by wider market conditions. Lenders typically rely on swap rates when setting interest rates, as these reflect future funding expectations. The Bank of England Base Rate is also influential, but to a lesser degree.

Development finance compared to other funding options

It’s important not to confuse development finance with other forms of property lending.

Bridging loans, for example, are better suited to light refurbishments and short-term funding gaps rather than full development projects.

Conversely, buy to let and commercial mortgages are used once a property is complete and producing income. Development finance is a tool that covers the gap between acquisition and completion.

By recognising these differences, property businesses would be able select the right funding that falls in line with the stage and scale of their project.