Opportunity knocks for those who support developers
Mortgage brokers who get themselves up to speed with development finance could find an alternative way to expand their businesses and develop opportunities for long-term success, according to specialist lending bank, Shawbrook.
Its relationship director, Greg Pescott (pictured), believes that advisers who are clued up about the potential for funding projects such as infrastructure, housing, or commercial developments could thrive. The market is picking up, he suggests, though it still faces challenges.
Development finance usually involves a mix of public and private funding and is designed specifically to assist with the purchase and build costs associated with a residential or commercial development project. It is typically short-term funding, with lifecycles in the range of six to 24 months.
“As we hopefully move into a more stable marketplace, introducers who are proactive, informed, and innovative will be well-prepared to capitalise on new opportunities, grow their client base, and achieve long-term success,” Pescott told Mortgage Introducer.
“The development finance space offers mortgage intermediaries an alternative pathway to expand their business, enhance their expertise, and strengthen new business opportunities in a diverse manner.”
He added: “Working with developers can provide an opportunity to help fund new development projects and offer the secondary business opportunity of assisting with mortgages for new home buyers.”
Read more: How the specialist development finance market has turned a corner
How much demand is there for development finance?
Pescott identifies what he describes as a ‘cautiously emerging demand’ for development finance and he believes that 2025 will see the sector grow further. It is seeking to increase regional growth in all areas of the UK, promote sustainable development, and continue delivering technological integration. Competition will drive innovation, he suggests.
“There is a sizeable demand for housing,” he said. “Residential housing is still the number one priority, with affordable housing a key requirement for homeowners, especially the first-time buyer market.
“The drive to develop the private rental sector is also high on the agenda especially in urban centres. Then we see the growing sector of co-living spaces which offer affordable, communal-style housing, particularly in our major cities.”
He continued: “Mixed-use developments that blend residential spaces with retail, leisure, and green areas are popular, especially in urban regeneration areas plus make use of redundant commercial spaces.
“We’re also seeing a focus on urban regeneration projects, which transform brownfield sites into residential and commercial spaces, blending residential, retail, leisure, and entertainment into community hubs, providing a village feel in city locations.”
Despite a gradual calming of the UK economy, Pescott acknowledges that there are still uncertainties in the development finance market, such as high costs, labour shortages and the cost of funding. Developers need to see supportive government policies, planning reforms and continued economic stability to ease the delivery of projects, he believes.
“We are still witnessing economic uncertainty which is affecting property values and demand forecasts,” Pescott noted. “Developers may find it harder to assess potential returns on new projects, increasing the financial risks associated with development finance.
“With this in mind, some funders may become more cautious, especially when it comes to high-leverage projects. This has created funding gaps that private and alternative lenders are stepping in to fill, often at a premium cost. Securing a complete funding package has become tougher, especially for small- to medium-sized developers. This can slow down projects or force them to rely on costlier sources of capital, impacting profitability.
“Over the last 12 months the UK government has implemented regulations like the Building Safety Act and the Future Homes Standard, which impose more stringent safety and environmental standards on developments. Although welcomed in the industry, these regulations - while beneficial for long-term quality - increase project costs and timelines, creating an added financial burden. Compliance with new regulations may deter investment or make certain projects financially unviable.”
As development finance relies on accurate project planning and risk management, these delays and cost fluctuations make it harder for developers to deliver projects on time and on budget, raising the risk for lenders and impacting financing terms.
Mortgage intermediaries wanting to explore the market will need to be familiar with the unique needs of development projects, suggests Pescott, and understand the alternative funding, behind them, including solutions such as bridging. Funder workshops and accredited courses are available to develop this knowledge, he said.
