As the excitement of the New Year wanes, now is an opportune moment to consider just what 2020 is likely to have in store for the UK financial market. Leaving Brexit to one side, various sub-sectors of the financial industry have either high hopes or big concerns about their relative outlook. Yet for those working in property development finance, there is an optimistic mood.
Property development finance refers to the part of the alternative finance industry that funds property projects. Investors lend their capital to a development finance firm, who then arrange for this capital to be loaned to developers and construction firms undertaking new-build projects. The investors benefit from the potential to earn significant returns, while developers enjoy fast access to the loans needed to fund their construction efforts.
So, why is the industry outlook positive? Well, one major factor is the entrenched demand for housing in the UK. The acute imbalance between housing supply and demand has meant that prospective homeowners are struggling to get on the property ladder. The construction of new-build properties is just one of the many solutions required to meet growing market demand for bricks and mortar. This is where property development finance comes into place, offering quick and efficient lines of funding.
The rise of development finance
In 2008, the UK and world economies were plunged into an economic
downturn the likes of which had not been seen since the Great Depression of
1929. With that, well-known high street banks naturally became much more risk-averse
and began adhering to more stringent lending requirements. This was the result
of public pressure and a government clampdown – the narrative suggesting
(perhaps rightly) that banks had been careless.
This shift had a huge impact on the ability for businesses to acquire
new loans, and for property developers, in particular, to secure new funding
for their developments. But they still needed credit from somewhere, leading to
the precipitation of second-level institutions known as alternative finance
Move forward to the present day and these alternative finance lenders are actively challenging the monopoly once held by the high street banks. And for construction companies in need of finance, there are significant advantages on offer when dealing with a development finance firm. They can either raise all the capital needed for a project, or partner with a heritage or challenger bank if senior debt is required.
Catering to the nuanced needs of the property sector
The property sector places a significant emphasis on the bespoke and individual; all projects have their own risks and benefits, quirks and opportunities. While high street banks may be hindered by blanket criteria when approached by developers, the property development finance sector is prepared to consider all kinds of proposals on a case-by-case basis. This agility means they are able to take new opportunities based on their actual merits and also deliver impressive returns for investors that may not be available elsewhere.
There are also notable benefits for investors in property development finance firms, who are able to personally invest in the oversight of projects and offer any expertise they have along the way. For those who care where their money is going, seeing a project come to life can be a fulfilling and exciting experience.
Further, there is arguably a moral aspect, too. The UK is in desperate need of new, high-quality dwellings, (apparently to tune of 344,000 a year until 2031), and hundreds of thousands of young people cannot afford to get on the property ladder. All this certainly points to the conclusion that any sector that supports and encourages the construction of new property in the UK is doing a huge public good.
In summary, 2020 should be another strong year for the property development finance sector. Increasing market demand for new homes across the UK, combined with low interest rates and the flexibility of property development finance firms to address the demands of their borrowers, means it has an important role to play in supporting construction firms and increasing the UK’s housing stock.
About the Author
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.