As the director of At Sunrise Commercial Finance, I’ve seen the UK property market ebb and flow, but one trend that’s really shaking things up for aspiring developers and investors is the shift in how lenders approach ground-up new build residential developments. If you’re looking to embark on your first (or next) project, understanding these changes is crucial.
You might be wondering why lenders, who were once seemingly eager to back new build schemes, are now tightening their belts, reducing loan-to-value (LTV) ratios, and sometimes even shying away from new build flats altogether. It’s not about losing faith in the property market entirely, but rather a strategic response to evolving economic conditions and market dynamics.
The Great LTV Squeeze: Why Less Money is on Offer
Let’s talk LTVs – the loan-to-value ratio. This is the percentage of the property’s value that a lender is willing to finance. Historically, for experienced developers, we’ve seen LTVs for ground-up new builds sitting at competitive levels, sometimes even pushing past 70% of the Gross Development Value (GDV). However, many lenders are now reducing this to 60-65% of GDV, and sometimes even lower, meaning you, the developer, need to bring more of your own cash to the table.
So, what’s behind this reduction?
- Economic Headwinds: The UK economy has faced a period of uncertainty, with fluctuating interest rates and inflationary pressures. While inflation is slowing, and interest rates have seen some adjustments, the broader economic picture still encourages a more cautious approach from lenders. They’re factoring in potential market dips and slower sales periods, which could impact the profitability and exit strategy of a development.
- Increased Build Costs & Volatility: Despite some stabilisation, material prices and labour shortages remain a concern. Unpredictable build costs can eat into a project’s profit margin and increase the risk for lenders if the project goes over budget.
- Planning Delays: Frustratingly, planning system delays continue to be a significant hurdle. Prolonged periods awaiting planning approval tie up capital and increase the overall risk profile of a project, making lenders more hesitant.
- Shifting Buyer Demand: Higher mortgage rates have impacted buyer affordability. While there’s still a strong demand for housing, lenders are scrutinising the local market more closely to ensure there’s robust buyer appetite for the specific type of property being built at the projected sales price.
Size Matters: How Many Units Will Lenders Back?
The number of units, be it houses or flats, that a lender is prepared to finance in a new build development has also become a critical consideration. While there’s no hard and fast rule that applies to every lender, there’s a discernible trend towards smaller, more manageable schemes, especially for less experienced developers.
- Risk Mitigation: Larger developments inherently carry more risk. More units mean greater exposure to market fluctuations, potential delays, and increased sales periods. Lenders, particularly in the current climate, prefer to spread their risk across multiple smaller projects rather than concentrating it on one large scheme.
- Experience is Key: For inexperienced developers, lenders will almost certainly prefer to back projects with a limited number of units – perhaps 1 to 5 houses or a small block of 2-4 flats. This allows them to assess your project management capabilities and track record on a smaller scale before considering larger commitments.
- Market Absorption: Lenders need to be confident that the completed units can be sold within a reasonable timeframe. In areas with high supply, or where buyer demand might be softer, they’ll be very wary of developments with a large number of units, especially if they’re all coming onto the market simultaneously.
The Flat Truth: Why New Build Flats Face Scrutiny
Perhaps one of the most noticeable shifts is the reluctance of some lenders to finance new build flats, or at least their heightened caution. This is a nuanced issue, but it boils down to several factors:
- Value Retention Concerns: New build flats, particularly those in large, generic developments, have sometimes faced challenges in retaining their value compared to houses. Lenders are more sensitive to this ‘new build premium’ – the tendency for new properties to be priced higher than comparable older ones, which can affect resale value.
- Leasehold Complexities: The complexities surrounding leasehold properties, including ground rents and service charges, can make flats less attractive to some buyers and, consequently, to lenders. While reforms are underway, the historical issues have left a lasting impact.
- Market Saturation in Certain Areas: In some urban areas, there has been a significant oversupply of new build flats, leading to slower sales and potential price reductions. Lenders are acutely aware of these localised market conditions.
- Fire Safety Regulations & EWS1 Forms: While progress has been made, the ongoing implications of fire safety regulations and the need for EWS1 forms (External Wall System Fire Review) for some existing high-rise residential buildings have created a degree of uncertainty and caution within the lending community for new build apartment blocks.
Navigating the New Landscape: Your Broker is Your Ally
So, what does this all mean for you? It means that securing development finance in today’s market requires a more robust approach, meticulous planning, and realistic expectations.
As a specialist property finance broker at At Sunrise Commercial Finance, our role is more vital than ever. We work with a vast network of specialist lenders across England and Wales who understand the nuances of the property development market. We can help you:
- Understand Lender Criteria: We know which lenders are active in your specific type of project and what their current appetite is.
- Optimise Your Application: We’ll help you present your project in the best possible light, highlighting its strengths and addressing potential concerns.
- Access Bespoke Solutions: Many specialist lenders offer flexible terms not available on the high street, and we can often negotiate favourable LTVs and rates.
- Navigate Complexities: From planning to exit strategies, we’ll guide you through the entire finance process, ensuring you’re prepared for every eventuality.
While the lending landscape for new build residential developments has undeniably tightened, opportunities still abound for well-planned, viable projects. The key is to be informed, realistic, and to partner with an experienced broker who can help you secure the right funding for your aspirations.
Ready to discuss your next project? Get in touch with At Sunrise Commercial Finance today – we deliver fast, flexible, and reliable property finance solutions.
📞 Call us at 07939 091418
📧 Email: john@sunrisecommercial.co.uk
🌐 Visit: https://www.sunrisecommercial.co.uk/
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