By Luke Curtis, Joint Managing Director, VAST Commercial Finance
For much of the period between 2016 and 2021, development finance operated in relatively benign conditions. Interest rates were low, capital was readily available, property values were rising and many schemes appeared capable of absorbing mistakes, delays or cost overruns.
Today, the landscape looks very different.
Developers face a combination of higher borrowing costs, elevated construction prices, increasing regulation and a more cautious lending environment. Yet despite these headwinds, deals are still getting funded and viable projects continue to move forward.
The difference is that lenders now expect a far greater level of scrutiny, professionalism and realism than they did during the era of ultra-low interest rates.
A more challenging market
While interest rates often attract the headlines, they are only part of the story.
Construction costs remain significantly higher than they were five years ago. Regulatory requirements have increased, adding both cost and complexity to development projects. At the same time, many landowners and vendors have been slow to adjust their expectations around site values.
The result is that development margins have come under pressure.
Where developers could once rely on rising values to offset unforeseen issues, lenders are now examining schemes through the lens of downside risk. Gross Development Values (GDVs), build costs, programme assumptions and exit strategies are all receiving much closer scrutiny.
In simple terms, the margin for error has become much smaller.
Lower leverage means more equity
One of the most noticeable shifts has been the reduction in leverage.
Many lenders are taking a more conservative approach to loan-to-cost (LTC) and loan-to-GDV ratios than they would have done several years ago. As a result, developers are often expected to contribute more equity to projects.
This can create challenges for project viability, particularly for smaller developers. However, it has also encouraged a greater focus on disciplined project selection and realistic financial modelling.
Fortunately, the market has evolved to provide alternative capital solutions. Joint venture funding, mezzanine finance and equity partners can help bridge funding gaps where traditional senior debt no longer covers the full capital requirement.
Capital remains available, but only for schemes with strong fundamentals.
The rise of due diligence
Perhaps the biggest change is the level of information lenders now require before committing to a deal.
In the past, some lenders were willing to issue indicative terms based on limited information. Today, developers need to recognise that any weaknesses in the proposal will ultimately be uncovered during due diligence.
That means lenders want comprehensive information upfront, including:
- Detailed development appraisals
- Realistic build cost assessments
- Professional team credentials
- Market evidence supporting GDVs
- Planning information
- Exit strategy analysis
Increasingly, lenders are seeking reassurance not just that a scheme works on paper, but that it remains viable under a range of different scenarios.
Rather than assessing only the best-case outcome, many are actively modelling mid-case and worst-case scenarios before making a commitment.
Monitoring surveyors are now central to the process
Another notable development is the growing importance of independent monitoring surveyors.
Most development lenders appoint monitoring surveyors to oversee projects throughout the construction phase. Their role is to validate costs, assess progress on site and provide lenders with independent confirmation before funds are released.
At the outset, the monitoring surveyor will review the developer’s cost assumptions and programme. During construction, they will inspect completed works against the agreed schedule before recommending further drawdowns.
For developers, this means that accurate schedules of work, realistic costings and strong project management have never been more important.
The days of optimistic assumptions and loose forecasting are largely behind us.
Exit strategies matter more than ever
Lenders are also paying much closer attention to exits.
A successful development no longer relies solely on achieving the target sales values. Funders want to understand what happens if market conditions change.
That means developers increasingly need to demonstrate multiple exit routes, including:
- Open market sales
- Sales at discounted values
- Refinancing into investment facilities
- Retention strategies for rental portfolios
The ability to evidence a credible fallback position can often strengthen a funding application significantly.
In today’s market, lenders are looking for resilience as much as profitability.
Smaller schemes are proving attractive
One interesting trend is the growing popularity of refurbishment and conversion projects.
Some experienced developers who previously focused on ground-up developments have shifted towards smaller refurbishment opportunities, attracted by lower risk profiles, reduced planning exposure and stronger profit margins.
Demand for housing remains robust, but many developers are finding that simpler projects can offer more attractive risk-adjusted returns than larger, more complex developments.
In a market where certainty has become increasingly valuable, manageable schemes often present compelling opportunities.
Opportunities remain for well-prepared developers
Despite tougher conditions, development finance remains very much open for business.
Lenders continue to support projects that are well-conceived, realistically appraised and backed by experienced teams.
The strongest funding proposals typically share several characteristics:
- Proven developer track record
- Strong professional team
- Realistic build costs and programme
- Sensible GDV assumptions
- Clear exit strategy
- Meaningful developer equity contribution
The era of easy development finance may be over, but that does not mean opportunities have disappeared.
If anything, the current market is rewarding professionalism, preparation and disciplined execution.
For developers willing to adapt, funding remains available and deals are still getting done.
About the Author
About the AuthorLuke Curtis is Joint Managing Director of VAST Commercial Finance. Luke has more than 20 years’ experience in financial services, having worked for Barclays Commercial Bank, Bank of Ireland and First Rand Banking Group/Aldermore Bank where he launched and headed up the MotoNovo Commercial Finance business.
Previously, Luke worked in construction, and he retains a passion for supporting property and real estate businesses.
For friendly, expert advice about any aspect of real estate finance, call Luke on 07368 868043 or Email [email protected]
