Complete Guide to Development Finance

Development finance is a specialist form of property lending designed to fund construction and development projects. Unlike a standard mortgage, which is secured against a completed property, development finance is structured around the creation of new value through building, converting, or substantially refurbishing property.

The key distinction is that development finance is project-based rather than asset-based. Lenders assess the viability of the proposed development, including the build costs, the projected end value (known as Gross Development Value or GDV), the developer's experience, and the planning status. The loan is typically drawn down in stages as construction progresses, rather than provided as a single lump sum.

Development finance is used for a wide range of projects including ground-up residential new builds, commercial-to-residential conversions, heavy refurbishment schemes, mixed-use developments, and purpose-built student accommodation. In Hackney, we see all of these project types, from warehouse conversions in Stoke Newington to high-rise residential towers on the Haggerston.

Development finance operates on a staged drawdown basis. Here is how the typical process works:

First, the land or property purchase is funded at completion. The lender will typically provide up to 60-70% of the purchase price, with the developer contributing the balance as equity.

Second, build costs are released in tranches as construction progresses. An independent Monitoring Surveyor (MS) or Quantity Surveyor (QS) visits the site at each stage to verify that work has been completed to the required standard before the next tranche is released. This protects both the lender and the developer.

Third, interest is typically rolled up and added to the loan balance rather than being paid monthly. This means developers do not need to service the debt during the construction phase, preserving cash flow for the build itself.

Finally, the loan is repaid upon completion of the project, either through the sale of the finished units or through refinancing onto a long-term investment mortgage if the developer intends to hold the asset.

Three metrics are central to development finance:

Loan to Cost (LTC) measures the loan amount as a percentage of total project costs, including land purchase and all build costs. Typical maximum LTC is 65-70% for senior development finance, meaning the developer needs to contribute at least 30-35% of total costs as equity. With mezzanine finance layered on top, combined LTC can reach 85-90%.

Loan to Value (LTV) is used less frequently in development finance than in standard mortgages, but some lenders reference day-one LTV (the loan against the current value of the site) as part of their criteria.

Gross Development Value (GDV) is the projected market value of the completed development. Lenders typically cap their exposure at 60-65% of GDV. This metric is critical because it determines the ceiling on how much a lender will provide, regardless of the LTC calculation. An independent RICS valuation is required to establish the GDV.

Development finance carries several cost components that developers should budget for:

Interest rates typically range from 0.65% to 1.2% per month (7.8% to 14.4% per annum), depending on the lender, the LTC ratio, and the developer's track record. Interest is usually rolled up and paid from the proceeds of sale.

Arrangement fees are charged by the lender at the outset, typically 1-2% of the gross facility. These are often deducted from the initial drawdown.

Valuation fees cover the cost of the independent RICS valuation that all lenders require. For Hackney projects, these typically range from 2,000 to 5,000 pounds depending on the scheme's size and complexity.

Monitoring Surveyor fees cover the cost of site inspections during the build. Each visit typically costs 500 to 1,500 pounds, with visits occurring at each drawdown stage.

Legal fees include both the developer's legal costs and the lender's legal costs, which the borrower is required to pay. Combined, these typically range from 5,000 to 15,000 pounds.

Exit fees are charged by some lenders upon repayment, typically 0-1% of the gross loan. Not all lenders charge an exit fee, and this is a point we negotiate hard on our clients' behalf.

The development finance application process typically follows these stages:

Initial Enquiry: You provide us with your project details, including the site, the proposed scheme, costs, and GDV. We assess viability and identify suitable lenders.

Indicative Terms: Within 24 hours, we present you with indicative terms from one or more lenders, outlining the proposed facility amount, rate, fees, and key conditions.

Full Application: If you wish to proceed, we prepare a comprehensive application pack including the project appraisal, build cost breakdown, comparable evidence, planning documentation, and your CV and track record.

Valuation: The lender instructs an independent RICS valuer to assess the site's current value and the projected GDV. This typically takes 2-3 weeks.

Credit Committee: The lender's credit committee reviews the application and valuation. For straightforward schemes, this can be completed in days; for complex projects, it may take 1-2 weeks.

Legal and Completion: Solicitors are instructed on both sides to prepare the facility documentation. Once all conditions are satisfied, the facility completes and the initial drawdown is made.

Development finance for Hackney projects carries several borough-specific considerations that developers should be aware of:

Planning complexity varies significantly across the borough. The Haggerston and London Fields fall within Opportunity Areas that support tall buildings and higher density, while areas like Hackney Wick and De Beauvoir Town have conservation area restrictions that limit height and require sensitive design. Lenders need confidence that planning is robust, and we help developers present their planning position clearly.

Property values in Hackney span a wide range, from around 430,000 pounds average in London Fields to over 650,000 pounds in Dalston. This affects GDV projections and the comparable evidence that valuers use. Our local knowledge ensures GDV assumptions are credible and defensible.

Construction costs in Hackney can be higher than outer London boroughs due to restricted site access, parking constraints, and the need for specialist techniques in some waterfront or heritage locations. We ensure build cost estimates are realistic before approaching lenders.

The London Overground has been transformative for property values in the western part of the borough, particularly Hoxton and Hackney Wick. Lenders are increasingly recognising the uplift potential in these areas, which can support higher GDV projections and more favourable terms.