High cost of Development Finance creates opportunities for Investors

Friday 13th April 2012

The number of new build projects in residential and commercial property has been slow since 2008 due to the lack of available development finance.  Mainstream lenders such as the High Street Banks have almost disappeared. Developers are approaching companies such as Close Brothers Property Finance for development loans.

At a recent seminar I attended, Oliver Powlestand of Close Brothers Property Finance said that they very much open for business; citing various development finance they have recently extended between £ 2.9 m and £ 10.75 million. These projects fit neatly into their lending parameters of residential or pre-let commercial between £ 500,000 to £ 10 million loan size in the South East or strong regional towns being constructed by experienced developers.

The typical interest rates total nearly 10% of the amount loaned with personal guarantees required.

What about developers of properties further a field?  How do they raise finance for projects?

Developers are looking for unique ways to obtain property finance; they really have started to think outside the box. Simply selling properties off-plan is not going to work in the current climate, property investors want a measure of security that their funds are protected.

The owners of the award winning Hurst House Hotel in Laugharne, Carmarthenshire Wales have created a unique way that every day investors can finance the future growth and expansion of their boutique U.K hotel with complete peace of mind. They are selling their existing 18 suites with a guaranteed return of 10% per annum which is a proven yield from current bookings. Investors can purchase a stake in Hurst Hotel room investment with £30,000 including all costs and receive a net income for 15 years of £ 3,000 per annum.

Instead of paying the banks 10% interest, they are quite simply giving the investors ownership of the underlying asset - hotel room as an investment - with the same 10% interest rate as income. The hotel owner will be using the funds to expand the 18 room boutique hotel to an increased number of suites in order to maximize income by catering for wedding parties which typically require space for 50 people.

The hotel wants to buy back the hotel rooms at a later stage and guarantees to purchase the hotel rooms (first 10) back from investors at £ 45,000 which is 150% of the price paid within a 15 year period. The cost of finance to the current hotel owner is rather high but due to the lack of available finance it is the only way for some developers to proceed. The creation of a hotel room investment is a win/win situation for both the owners and investor alike.