How to finance your first development

Property development can be lucrative, but it certainly isn’t easy. Inexperienced developers can find it challenging creating realistic, and profitable feasibilities that meet financing requirements. 

With that in mind, we talked to Fortis Capital Director Nick Turner for some expert guidance on how to finance your first development - from understanding costs, to having the right team of professionals around you. 

Understand your costs early & plan ahead

The biggest challenge in the current market is that costs are increasing, while property prices are decreasing. Turner says this can put a squeeze on development profit margins, and if the profit margin isn’t there it can be hard to get a lender on your side:

“The key is understanding the build costs really early on, applying realistic square metre rates and challenging all costs as you go”.

“You need to create a well worked feasibility study that’s robust and realistic. Costs should be at market levels and some stress testing of values to factor in where the property market will be once the product is completed”.

“Within the development budget you also want a reasonable contingency sum to de-risk it from a developer and lenders perspective. We would expect to see a minimum of 10% of the  construction cost to cover the potential for contract variations and cost escalations”

Ideally any estimates around build costs need to be verified by a quantity surveyor as early as possible, while assumed end values of the development should be supported by a valuation prepared by a registered valuer, or presales evidencing market acceptance. Although increasingly difficult to achieve, pre-sales are particularly valuable as they help to de-risk a project from a lender's perspective. 

Additionally, in a market with inherent supply chain issues, it’s a good idea to plan ahead and source materials early to minimise the effect of price escalation and delays. 

Have a good contract in place with your builder

To make sure your costs don’t balloon and your project is delivered on time, it’s essential that you have a robust contract in place with your builder. Turner recommends speaking to a lawyer with experience in this field to ensure you’re covering all your bases and adequate performance controls are in place. 

It may be a good idea to include retentions in the contract to ensure that the builder is wearing a portion of the risk:

“A portion of the amount owing to the head contractor is held back off each drawdown. When the contract comes to an end the retentions are paid to ensure successful completion and that any defects are remediated by the builder”.

Another clause that you may want to consider is liquidated damages:

“This is a daily amount which the head contractor has to pay the developer in the case of a breach of contract due to delays to the agreed construction programme. This may cover such things as the additional finance costs incurred by the developer due to delays caused by the non-performance of a builder”.

And finally a contractors performance bond may be considered: 

“A performance bond is usually issued by the head contractor's bank in favour of the developer and lender. The bond is typically 5% of the contract value and can be called upon in the event of a material breach in contract by the head contractor such as insolvency, abandonment or complete non performance”.

Build a team you can trust

Property development is complex and technical, with many moving parts. Turner says that all developers, no matter how experienced need to be supported by a strong team of experienced professionals:

“Most importantly, the builder or head contractor needs to have the skill set to deliver on your product. Look for a builder that has successfully completed projects of a similar scope, and make sure they have capacity for your project - if they’ve got several builds on the go they might not have adequate resources to complete your project within the agreed timeframe”.

Key professional consultants should include a contract lawyer, accountant, architect, planner, quantity surveyor and engineers.

Choose a lender who knows property

Fortis Capital understands property development - we know what it takes to get a project built, and we’re here to ensure you get it done. We can help when the banks won’t, providing you with outside the box funding solutions.

Enquire now and hear back within 24 hours.