Real Estate - Real Estate Investment

Property development finance for inner city regeneration projects is getting easier as more lenders are starting to realise that there are high profits to be had in helping property developers fund projects.

Run down areas of inner city or town centre locations are often the best investment, particularly if they are surrounded by better quality housing. Finding a development project in a regeneration area can see an immediate profit potential of 10% to 20% above other similar projects.

However developers still need to do some careful research and check there is a well-funded renewal plan in place. Areas such as Stratford East in London, parts of Glasgow and inner city areas of Hull all have regeneration schemes in place and are proving irresistible to investors and buyers. A good example of the perfect regeneration project would be an area like Stratford in London with the 2012 Olympics being hosted in the area.

Demand for property development finance in regeneration areas is exceeding all records with property developers eagerly snapping up brownfield sites. It is far easier to develop a brownfield site than to try and get planning permission on greenfield sites. The location of brownfield site makes property development funding more attractive as they are already in prime locations for amenities such as shops, cinemas, bars and employment.

Planing restrictions on greenfield sites means that regeneration is the way forward. Finance for property development in these areas is very often geared to the expected increase in value once the whole site has been finished. Although far more care is taken by the lender when researching the risk involved in this type of property development. Thorough investigation of the local regeneration plan will be carried out by the lender to ensure the project falls within the local planners requirements.

Mortgage lenders have improved their product offerings to accommodate the inner city type of property, this includes helping property developers arrange mortgages for residential dwelling situated above commercial premises. In particular the buy-to-let mortgage has really come into its own in this environment. It is not unusual to see an entire development of apartment being snapped up by investors before the project is even ready for viewing.

When researching the property development finance options available it is vital that the builder tries to use a specialist broker. The mainstream residential mortgage broker is sometimes tempted to dabble in commercial finance, usually attracted by the idea of large commissions. In reality arranging finance for property development is a highly skilled job, and relies on experience and personal contacts. Property developers trying to arrange finance for regeneration projects are also well advised to try to use local brokers wherever possible, this is because a local broker is more likely to know of any regional issues which may adversely affect the project.

Local and central government and the EU often help fund larger regeneration projects with grants and subsidies, or by providing infrastructure improvements such as transport, schools and hospitals. Seeing publicity about these types of schemes is a sure indicator that the area is ripe for speculative development. It is worth bearing in mind that some of these larger projects can take several years to come to fruition, so it pays to plan ahead.

It is quite likely that the property developer will also need to consider bridging finance as part of the overall property development funding package. This is because property development finance is not usually available for purely speculative deals, especially where there is no planning consent. Bridging finance can be used to secure the purchase of a site at a discount whilst the value is enhanced with planning permission.

The UK has a chronic shortage of housing and in particular affordable housing, so it seems ironic that arranging property development finance for brownfield sites can be a real headache.

Lets start by defining what a brownfield is, essentially it can be any piece of land which has had a previous use, such as a backgarden or parking area. Typically though, you would think of a brownfield site as being petrol stations, workshops, factories, office blocks and car parks. To be called a brownfeld development you would usually expect to see complete site clearance with the previous structure being completely removed.

Local planning authorities are under pressure to ensure that 60% of land used to build new homes is built on land that has had previous use.

Arranging property development finance for brownfield sites can cause problems because of the extra expense associated with examining the land and clearing any contamination. Environmental controls require that the soil be tested for contamination and that if any is found the top soil has to be completely removed. This contaminated soil has to be disposed of in special landfill. This process costs a significant amount of money.

The extra costs associated with clearing a brownfild site and the limitations caused by the size of the plot are the main reasons why it is such a challenge to arrange property development finance. However, for the property developer who is prepared to put in the extra effort there are some handsome rewards.

Given that most brownfield sites are in town centre locations, and the continuing demand for luxury apartments there is a strong motivation to work through the challenges provided by these types of plots. There are specialist lenders willing to fund development of petrol stations and factories so there is a way to get the job done.

The types of property development funding available varies from modest Loan to Values (LTV’s) with highly competitive interest rates, right up to the specialist schemes offering up to 100% funding, although the rates are reflective of the risks.

Once the development of a brownfield site starts it is really important to get the project competed as quickly as possible, after all, time is money!

If you are planning to undertake the development of a brownfield site in the near future, it is important to collate as much information you can about the project: Prepare your CV confirming your building experience and examples of projects you have undertaken. It is worth commissioning any professional reports, including ground investigation, environmental reports and a valuation. Finally you must provide a full financial evaluation including the costs associated with site clearance.

Banks have a reputation for being slow to release staged payments and for being rigid when problems arise whereas specialist property development finance companies tend to be more flexible and willing to accommodate last minute changes to plans, but their fees do tend to be higher so it is important to use a broker.