The success of the UK’s Covid-19 vaccine rollout is providing renewed hope across the property sector. Demand for housing is rebounding, and the government’s new mortgage guarantee scheme, facilitating the return of low deposit mortgages (95% loan-to-value products), is expected to provide the market with a further boost.
A recent spate of new planning laws is also good news for property developers. In August 2020, the government announced a loosening of planning rules and changes to permitted development rights (PDR), making it easier to build properties and make changes to existing ones. Up to two storeys can now be added to buildings without full planning permission, for example.
In addition, air rights (owning the rights to the air above a property that could reasonably be used) mean developers can now build homes for sale or lease, on top of commercial premises, high above the crowded streets of the big cities.
All of this means increased opportunity for property developers to build more. From housing to leisure to commercial property, there has never been a better time for property developers to obtain finance for a development scheme in Manchester.
Property development in Manchester
Following an unquestionably challenging year, the property development market has remained resilient throughout 2020 and to date. The construction sector has been busy despite the challenges of three national lockdowns, and all schemes reported in the city last year were brought to fruition. The two most noteworthy sectors for Manchester in 2020 were undoubtedly residential and office space.
The housing market has continued to perform staggeringly well, and its growth remains one of the most impressive in the UK. According to Hometrack’s UK Housing Price Index, the annual rate of house price growth in Manchester was 4.3% in 2020, the highest since April 2017, and the city has the second highest inflation rate in the UK (after Liverpool) at +6%, over twice that of London (2.9%). It’s no surprise then that 35 schemes completed during 2020, providing the highest level of residential properties in at least 18 years, and over 12,000 residential units are currently under construction for the third consecutive year, despite almost 5,000 new homes being delivered to the market.
Nearly 1.2m sq. ft of office space was constructed in Manchester last year, the largest amount since 2008’s global financial crisis (with five new developments accounting for nearly half of it), leading to the UK’s highest overall vacancy rate of any city in the fourth quarter of 2020, at 13.8%. Whilst demand for office space is expected to boom later this year as people return to the office, space in the city centre for further commercial property development is currently limited, with only three office schemes in the pipeline for 2021.
2020 property development schemes in numbers
Information provided by the Deloitte Manchester Crane Survey 2021
Types of property development in Manchester
- Light refurbishment – minimal rather than structural changes to the property, such as decorating throughout or a new kitchen.
- Heavy refurbishment or renovation – more extensive changes and upgrades, including new electrics, extensions, loft conversions or converting a house into flats.
- Permitted development – generally a total overhaul of existing commercial properties, such as converting an office into flats, which don’t require planning approval from the local planning authority, but do require a permit.
- Ground-up development projects – where development finance is used to finance both the land purchase and the build costs (build costs first). This is the most comprehensive type of property project and normally involves starting with an empty plot of land (or a building that needs to be demolished).
Property development finance is a short-term loan used to fund construction or refurbishment projects. The loan amount is normally based on gross development value, or in simpler terms, what the building will be worth once the work is complete.
Total project costs, minimum borrower equity and day one land leverage are also taken into account by the lender, and the borrower pays back the loan in pre-agreed phases, either through the sale of the property or refinance.
Types of development finance
- Senior Loans – a first charge loan that would normally make up the majority of the funds needed to complete a property development project.
- Stretched Senior Loans – a first charge loan that provides a higher Loan to Cost or Loan to Value percentage than a typical Senior Debt facility can allow.
- Mezzanine Development Finance – a top-up loan to bridge the gap between the developer’s available deposit and the loan available from the senior lender.
- Equity – the cash sum (or deposit) a developer puts into a project to buy and develop it. Increasingly there are lenders willing to help with this part as well.
- Development Exit Funding – used to repay outstanding finance against a property development once the project is complete.
- Regulated Development Finance – used to fund the build of property that is to be used as a primary dwelling of the borrower.
How does property development finance work?
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- You need to consider the following factors:
- Land costs
- Build costs
- Lender fees
- Professional costs – surveyors, solicitors, advisers, etc
- Contingency costs
A lender will confirm the total gross loan they are willing to lend, and then deduct lender professional fees, lender interest, lender arrangement fees and 100% of the build costs first. Any residual loan is then available to draw against the land, so is often referred to as the land loan.
Every lender has different lending criteria. So essentially, if you ask 10 lenders to quote on a project, you will receive 10 different loan amounts and 10 different loan pricing proposals. At the bottom end of the market, lenders will demand a 30% or more deposit, whereas some will accept just 10%, or occasionally even less.
Understanding this nuance is often the difference between being a good developer and a very successful developer. Cheap funding is almost always a false economy as it means you’re putting in more equity, which is ultimately your most valuable asset. Brickflow’s search engine does the hard work for you, we search more than 20 lenders instantly giving you real-time access to the development finance market, and lenders you can trust. Here’s our latest list of trusted lenders.
How to repay your development finance
You will need to provide lenders with a detailed exit plan before a loan is agreed. Typically, this would be one of two routes:
- Sale of the finished properties.
- Long-term refinancing – common when the developer aims to retain use of the completed development.
If the timings for your scheme change, developer exit finance is also a good option. This is a type of bridging loan, and a handy tool to pay off the original development loan, and provide funds until you can sell the site.
Why use development finance to build in Manchester?
There are several reasons to secure development finance to fund your Manchester property project:
- Debt is always cheaper than using your equity (unless you have access to a lot of your own cash). If you put in less capital your returns are actually likely to be higher.
- You can take on bigger projects, which would otherwise be out of reach.
- You can run with multiple projects at the same time, or start a new scheme before your existing one has sold or fully sold, increasing your potential profits.
If you have the right access to development finance, it’s clear that there’s a great deal of opportunity for property development within Manchester. But securing funding continues to be a challenge, with the 2019 Federation of Master Builders’ survey revealing that more than a third of SME developers (39%) say access to finance is a major barrier to their ability to build more. Concerns about the level of loan refusals are also at their highest in three years.
Brickflow solves this challenge by providing instant online access to development finance. We search the market in real-time, providing loans from lenders you can trust, empowering you to borrow smarter, mobilise quicker and ultimately get ahead of the game, in a city where space may be limited but opportunity is rife.
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