Understanding property development finance in 2020
Paul Howells, CEO of Accumulate Capital, explains why property development finance is becoming more mainstream and this year will see further growth in this type of alternative lending
The term “alternative lending” refers to a specific phenomenon that has taken hold of the UK’s finance sector – that is, the arrangement and deployment of loans to consumers and businesses outside of traditional lending institutions. Property development finance is a subset of alternative finance, and for multifarious reasons, it is becoming more mainstream.
For many businesses and property developers, the most important thing when seeking finance is speed. That is exactly what development finance offers: the fast capital to fund a project and successfully maximise on a new opportunity. 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.
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? In short, the ongoing lack of housing in the UK, often termed the housing crisis, is a huge issue that has created massive demand for new builds, putting pressure on construction firms nationwide. I explain just what I mean by this point below.
Understanding the rise of alternative lenders
The end of the 2000s saw the UK, and the rest of the world, plunge into the most damaging economic downturn since the Great Depression of 1929. The impact this had on the nation’s main financial institutions cannot be understated; they became hugely averse to risk. This resulted in the implementation of more stringent lending criteria that in turn made it more difficult for businesses, including many reliable and profitable ones, to acquire credit.
In response, we have since witnessed the rise of alternative lenders who offer businesses a more flexible and accessible way of acquiring finance. The growth of the alternative finance industry has been nothing short of impressive, meaning it has now become a credible avenue for those in need of loans.
Looking at property development finance in particular, a limited housing stock coupled with a growing population has created significant market demand for the construction of new-build properties. The government’s ambitious housebuilding targets, which have been periodically missed, is also placing added pressure on construction firms, who hold the key to solving the housing crisis and ensuring adequate accommodation is added to the market.
What makes property development finance so popular?
There are various advantages for companies using development finance. The companies responsible for arranging it all tend to be run by smaller, more specialist teams than the traditional banks, they are nimbler and can consider prospective projects on a case-by-case by basis.
The property sector is defined by difference; all projects have their respective costs, risks, benefits and opportunities, so this is certainly a strength. The heritage banking sector, which tends toward blanket criteria, is weaker in this regard. What’s more, property developers can either raise all the capital needed for a project, or partner with a heritage or challenger bank if senior debt is required.
The benefits property development finance offers for investors are significant too, of course. It links firms with investors keen to support a project by investing their funds. Those firms responsible for facilitating the transactions can also become partners with the developers — helping with oversight to ensure projects continue as planned. As with any sort of venture that has multiple funders, this is also crucial in ensuring that investors are aware of how a project has been progressing.
Positive year ahead
In sum, 2020 looks set to be a positive year for property development finance, with demand set to grow as a result of some of the factors listed above. At a time when demand for property is rife, ensuring the financial channels are in place to support real estate projects is extremely important.
Thankfully, the UK boasts well-renowned construction companies and a pool of investors eager to support new developments. Property development finance is able to facilitate this relationship and looks set to only grow in significance in 2020 and beyond.
Paul Howells is CEO of Accumulate Capital – an investment and property development firm. Accumulate Capital connects registered investors with developers in the property development finance sector to enable selected, high-yielding projects in the UK and overseas.