At Fox Davidson we work with clients who are just starting out on their property development journey. We have helped many clients over the last 15 years to grow successful property development businesses.
In this guide we look at the best strategy for starting out in property development.
The UK housing market and the role of the SME developer
The UK housing market has been facing a significant shortage of new houses being built, despite a growing demand for housing. This has led to rising prices and a lack of affordable options for many potential homebuyers.
There are several factors affecting the lack of stock. Factors contributing to the lack of new houses being built is a lack of available land for development. The UK has a relatively small land area compared to other countries, and much of it is already developed or protected. Additionally, the planning process can be slow and complex, making it difficult to get new development projects off the ground.
The demand for housing has been driven by population growth and demographic changes, such as an aging population and an increase in immigration. With the growing population, the demand for housing will continue to grow, making it essential for the government to find ways to increase the supply of new houses.
Overall, the lack of new houses being built in the UK is a complex issue that is caused by a combination of factors including lack of available land, lack of funding, and slow and complex planning. The main house builders have failed year on year to reach government targets for new homes. There remains huge demand for small to medium house builders. This is encouraging for first time property developers wishing to go full time into property development.
Property Developers In The UK
There are many ways to enter the world of property development and we have listed (what we believe) to be the ideal routes for first-time property developers.
The progressive route
The progressive route of getting into property development is slower but is a sensible way for a first-time developer to get into property development.
Step 1 – Home Ownership
Buying a property as your main residence should be a first-time developers starting point. Not only does buying a property to live in whilst refurbishing it have some tax advantages when selling (please get separate tax advice), but working on a property that you also live in can be done in your spare time without compromising your current full time job.
Refurbishing a property will give you the experience you need and if done successfully this can be repeated several times.
The funding for a main residence will also be the cheapest way of funding a property. Some mortgage lenders will lend up to 90% loan to value on a product with no early repayment charges.
If you plan to carry out any major structural works you will need to inform your lender.
Step 2 – Refurbishment of a property
Having built up your experience refurbishing and selling property you may now have the funds to move onto refurbishing property that will not be your main residence. You may decide to set up a limited company to acquire and fund the property.
Development finance lenders will lend to a limited company and will require personal guarantees from the directors and majority shareholders. Previous experience of refurbishing property will strengthen the case for lending.
Step 3 – Conversions
Having successfully refurbished property you may now wish to look at property conversions. Examples include converting a house into flats or changing a 3-bedroom property into an HMO. Again, your experience from steps 1 and 2 will hold you in good stead when applying for finance.
From here you can move into new build property development such as buying a property with a large garden, splitting the title and building in the garden or buying land to build property on.
The Joint Venture Route
For property developers who either have the cash but lack the experience, or who perhaps trade as a builder but lack the cash, the joint venture route is an option.
A joint venture is where you partner with someone who brings to the deal the experience or the funds that you are missing.
Many joint ventures work successfully as two parties come together and share their expertise and resources to develop property.
An example would be a builder who has always built for clients but never for themselves, and lacks the funds/assets to develop. By partnering with someone with cash to put down into a deal the two partners can now purchase and fund a development site.
Under a JV deal the profits are usually split at an agreed percentage between the JV partners.
100% development finance
It is possible to secure 100% development finance. However, 100% development finance lenders will need the borrower to have experience building property (experience relevant to the scheme they wish to build) and will need you to have property assets that can back up any personal guarantees. It is not possible for first time developers with no experience of building property to get 100% development finance. This is more suited to a builder who has historically built for clients and now wishes to fund their own development.
You may find our guide How To Become A Property Developer useful.
Fox Davidson Property Development Finance Brokers
Fox Davidson are an experienced property development finance broker in the UK. We advise new and experienced developers on all types of property development finance. For any advice or insight please do get in touch.