Could development finance be the saving grace of the real estate sector?

Jamie Johnson, CEO, FJP Investment

As is common in any period of heightened political and economic instability, Brexit has driven investors to explore safer markets that offer stronger returns. This trend has been exacerbated by lower returns on traditional investments;indeed, the current interest rate has remained at 0.75% since August 2018, with little sign of being revised upwards in the immediate future. This means that particular asset classes, such as development finance, have increased in popularity as investors seek options that not only offer reliable returns, but can also make their money work harder without committing to long-term investments.

Jamie Johnson
Jamie Johnson

This spells good news for the UK property sector, which is in need of support given the lack of attention it has received amidst the constantly changing Brexit agenda.With the real estate market feeling the strain of Brexit uncertainty, development finance could be the stabilising force needed to buoy the sector. However, despite its growing popularity in recent years, there are many property investors, and indeed consumers, who are still unaware of the potential returns development finance can offer.

For those who find themselves in this category, below is a brief introduction to the promising world of development finance, which should offer an indication of how it can benefit investors and the wider property market.

The promise of development finance

It is important to first establish exactly what we mean by property development finance. Put simply,this is a term used to describe loans for property development,which are typically offered on a short-term basis and have a pre-defined exit strategy. One prime example is debt investment.

All the different forms of debt investment currently available in the market, real estate funds are a category that have become increasingly prominent. In this situation, a private investor provides the funding required to develop or renovate a property.

AtFJP Investment we’ve noticed an increasing number of people moving to debt investment over the past few years to achieve regular, fixed returns. In fact, this was underlined in a recent survey we commissioned among more than 950 UK investors – 30% saw these characteristics as the main strength of debt investment. And while both equity and debt investment naturally carry risk, the attractiveness of debt investment is that investments are typically graded based on risk. Investors are therefore able to determine the risk profile that they want, and the length of time they are willing to be locked into an investment.

Supporting the wider property market 

Development finance isn’t just a lucrative option for investors, however. It also has the potential to play an important role in supporting house-building efforts across the country.

The general consensus suggests that, by the mid-2020’s, the UK needs to be building 300,000 new homes a year in order to meet the bludgeoning demand for housing and ultimately resolve the ongoing housing crisis. But with the recent distraction of Brexit pushing property down the long list of government priorities, it remains to be seen whether this ambitious target will be met.

This is where development finance can offer assistance: this form of investment can be used to bankroll residential properties, including projects of varying sizes. After all, access to loans is vital for SME developers, whose role in ramping up the supply of affordable and accessible housing across the country is crucial. Indeed, if these developers cannot access finance to purchase building sites and begin construction, the opportunity to contribute to the government’s house-building targets is threatened.

Besides this, development finance is also commonly used for refurbishment purposes to repair properties that are in a poor state – for the primary purpose of putting them back onto the market and then reselling at profit. Not only does this offer a strong incentive for property investors, but it’s also a good way to make use of existing housing stock without having to rely solely on delivering new-builds to meet existing targets.

Development finance could indeed be the stabilising tool the real estate sector so desperately needs. Positively, the aforementioned research revealed that 9% of UK investors currently hold a debt investment, with 20% considering doing so in the coming 12 months. This suggests that the market will continue to grow in the near future and offer much-needed relief for the housing sector.