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An introduction to property development finance in 2020

By Paul Howells, CEO of Accumulate Capital

From crowd funding platforms to revenue-based financing, the alternative finance sector is transforming the way investors and businesses alike are able to manage their credit, debt, savings and investments. A product of the global financial crisis, alternative finance is in many ways a movement against the rigid and inflexible structures mainstream banks have traditionally relied upon. This explains why the alternative finance sector grew by 35% in 2017 alone to reach a market value of £6.2 billion.

Of all the instruments, platforms and products currently sitting under the alternative finance umbrella, there is one sub-sector ideally positioned to grow in popularity over the course of 2020. By this, I am referring to property development finance. To understand the increasing importance of property development finance, it is first necessary to understand its need within the context of the UK real estate market.

Supporting UK construction firms

Paul Howells
Paul Howells

For those involved in UK bricks and mortar, it is difficult to ignore just how important property development finance has become in supporting new-build construction. At a time when the UK is calling out for the creation of new-builds to meet spiraling demand for property, construction companies are under immense pressure to take on new projects and increase the amount of opportunities available for prospective home-buyers.

The government has committed to building 300,000 new homes each year by the mid-2020s. And while construction is rising, it is questionable whether the UK will be able to meet these targets. Thankfully, property development finance offers a much-needed injection of capital into the market.

Make no mistake about it, funding is a vital part of any construction project– failure to secure the capital required quickly can result in a project falling through before it has begun. Indeed, a 2017 survey revealed that over half (57%) of small and medium-sized developers say finding access to finance was the biggest obstacle they face.

There are plenty of reasons for this. An often-cited issue is that mainstream lending institutions often rely on rigid lending structures which are not properly equipped to deal with complex applications. For construction companies, one of the most important factors when seeking finance is speed. Any unforeseen delays can cause significant stress and jeopardise the entire project. This is where development finance comes in, offering construction firms the fast capital needed to fund a project and successfully maximise on a new opportunity.

What attracts investors to development finance?

On the other side of this short-term loan arrangement, which tends to be funded privately, are investors, who have the potential to make competitive returns — especially in this current low-interest rate environment. Unlike other investment opportunities, development finance also encourages investors to become more actively involved in the construction projects they are involved in.

Finding new development finance opportunities was once a difficult task; however, the rise of property development companies mean that investors are now in a position to access new investment openings. Like Accumulate Capital, it is these companies that vet different construction projects and take on those that are best positioned to deliver attractive returns to their investors. They are also responsible for structuring the loans themselves, which are by their very nature complex for those who do not understand the intricate details of development finance. Some of these companies are able to arrange all the finance required for a project, either by raising the capital needed themselves, or by partnering with a heritage or challenger bank if senior debt is required.

Looking to the horizon

Looking to the coming 12 months, unfolding trends imply that property development finance will rise in popularity in 2020. So, what’s the reason for this likely rise? As described above, it is the ongoing lack of housing in the UK, often termed the housing crisis; a huge issue that has created massive demand for new-builds, putting pressure on construction firms nationwide.

With so much untapped demand for new-build constructions, there is a clear and present need for construction firms to take on new projects, backed by the capital needed to fund such undertakings. As such, property development firms will only grow in importance over the coming years as vital instigators of real estate activity in the UK.