Property and Construction
Funding and Asset Finance
Property development is an expensive business, requiring large amounts of capital over a long period. The projects involved have their own risks, particularities and processes, meaning that not all traditional methods of raising capital are appropriate for property development. Developers, therefore, have to take a specialised approach to ensure that each project is not only funded to the right level, but that the necessary flexibility and security are available to manage it throughout its lifecycle.
Candice Young explores conditions around raising capital for property development, the funding options available, as well as how to maximise your chances of success.
The property development cash cycle
Financing property development is highly cash intensive, with more risk involved than many other ventures. In addition, property projects often run over multiple years, with many potential opportunities for delays, cost overruns or market changes.
Since all projects run on a calculation of future value and returns, financing early on is based on robust calculations and research to determine:
How much capital is required.
What buffer or leeway will be needed to guard against contingencies.
The optimal commercial model to monetise the project.
What capital will be required for each stage (e.g. site acquisition, planning and compliance, construction, marketing etc.).
Sometimes all capital required will be raised early on, or it may be done in stages to minimise risk and tailor financing options to the stage of development. In any case, financing will usually be done via personal connections or institutions that specialise in these types of investments.
Options for raising capital for property development
Capital raising for property development usually relies on specialist providers to meet the unique needs of these projects.
Many first time property developers will start by raising money from personal connections such as former or current business associates, friends and family or community groups. These can be useful for the early stages of a project, especially if the developer lacks the existing credibility to raise capital from institutions. This can help set the project in motion, purchasing the site or getting planning permission, providing a foundation for raising further capital for development.
A joint venture with a more experienced, resourced individual can be another useful starting point for a developer in need of capital. In these circumstances, the partner provides the capital while the developer manages the project. At the end of the project will be an agreed profit or rental income share agreed between the two. These partnerships have the advantage of both parties being invested, providing potential leeway for further fundraising.
Joint venture partners can also be the lead fundraiser, using their assets and reputation to raise capital, providing either a management fee or profit share to the developer.
Property funding houses
Specialist lenders for property can be used at various points of the project, from short-term mezzanine loans to long term project funding. However, most expect the developer to introduce some of their own capital, which means some may still need a joint venture partner to provide a foundation.
Building a strong case for investment
Raising capital is done on the basis of the project plan, with investors looking to determine opportunity, risk, experience and market conditions to assess whether your plan has sufficient merit to invest. A robust plan requires:
Tested, realistic figures such as gross development value, detailed timelines and a detailed awareness of potential issues.
Cost analysis that considers market fluctuations, supplier choice, inflation and compliance.
Thorough site analysis, considering area, unit types and numbers, infrastructure and product-market fit.
Regulatory insight that proves you are likely to get the necessary permissions, approvals and meet the standards required.
These plans will often need to be reviewed as you go – conditions change, markets move and suppliers come and go. At each stage of fundraising, you need to show that your plans are in line with the latest information and best practices to make sure your projections are accurate.
These calculations and planning can be made simpler and more effective by working with an experienced advisor to handle projections, benchmark rates and check accuracy.
How we can help
Every property development project starts with a great business plan – analysis, forecasts and commercial insights are key for persuading investors of your plan’s potential. When it comes to building a watertight case, the right advisor can make all the difference.
At Haines Watts, we help guide development projects to success based on our experience and expertise:
Providing reliable due diligence for investors.
Reworking numbers as the market develops.
Providing access to a network of experts, from lenders to solicitors and JVPs.
Get in touch with a member of our team today.