Real estate developers have begun seeing steady work and revenue flows after a long pause due to the COVID-19 pandemic. The future overlooks a significant growth potential for real estate professionals. However, a huge part of this growth depends on the ease of accessing readily-available and adequate financing for developers to scale their projects. Enter development finance. This guide explains why development finance has become all the rage and how developers can tap into this financing trend.
What is development finance & how does it work?
Developers have various financing avenues. These financial opportunities come with strict processes that demand a huge lead time. Development finance can be a move away from this unfortunate reality. It’s a short-term property loan usually extending over 3-24 months and differs from other traditional financing solutions like mortgage loans.
For instance, development finance institutions focus on a property’s value after its completion, while mortgage lenders may consider property value at different development stages. Developers take these loans for tasks unique to their specific project financing challenges. So the purpose may vary from one developer to the other.
Generally, this type of project financing can help raise capital to cover the costs of construction materials and fees for professionals behind the project. Developers can kickstart this loan application process by understanding the unique application requirements of development finance institutions.
Many lenders demand essential documents early in the application process to assess your credibility and ability to see your project to fruition. For this reason, lenders will assess your existing finances, the experience level of all team members, from architects to contractors, and the location of your project.
Note that lenders may tie your loan’s approval to conditions like assuming oversight responsibilities of your entire project management efforts. It helps them to monitor and evaluate your efforts, ensuring value for money at every stage of your project.
Why it’s Popular
Development finance has been a mainstay in the real estate industry for a long time. However, the COVID-19 pandemic’s impact on the real estate sector, affecting consumer demand and limited financing options, has also taken the popularity of development finance among developers up a notch. Some key reasons why development finance has become popular today include:
Fast access to finance
Development finance is a quick solution for developers to drive hanging projects to fruition.
Accessing this financing option takes a speedy process compared to other traditional loan application processes.
Low-interest rates
Many developers rush for development financing due to the relatively lower interest rates. If you’re an experienced real estate developer, the rates may even drop further. Other factors like the project’s scale and borrowed gross development value can also reduce development finance interest rates.
Convenient repayment terms
Development finance is a short-term loan that doesn’t tie you to any long-term financial commitment. The terms are favourable, saving you from settling debts for extended periods.