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  • Writer's pictureTyson T

Can you obtain 100% finance for your property development?




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Is raising 100% finance for the elite or do we just have to look in the right place?


In the modern era, the rise of interest rates, inflation, the war in East Europe and the current living crisis, the world has felt the ripple effect. With the UK market being one of the most secure economies in the world and the financial hub of the western world, with an abundance of available funding and the mechanisms in which equity can be raised and deployed then why is it so difficult to find the cash rich investment opportunists?


As of early 2024 the UK equity market is valued at an estimated £2,47 trillion, ($3.1 trillion) making it one of the largest in the world. With the world equity market estimated to be around $104 trillion, the UK market constitutes to nearly 3% of the total market. The largest is the United States with a market capitalisation of $52.6 trillion which equites to over 50% of the worlds' equity market.


Now that we have established the size of the equity market, who are the players within this space. According to available figures there are approximately 678,000 HNWI (individuals with $1 million+). 4600 UHNWI (Individuals with $30 million in assets+) and around 1000 family offices. This shows the significant presence of high-net-worth individuals and family offices in the UK, reflecting the country's robust financial services sector and attractiveness to wealth management.


When entering the real estate world of property development, there is the grandeur of large returns and the ownership of potentially substantial assets. Some enter the market to make a difference, whether supplying much needed social housing, assisted living or retirement living, whilst others may do so to bring a vision of a modern design, the latest sustainability and ESG causes to fruition and of course the bottom line, most developers are developers because of the the profits that derive from the risks taken.


Access to funding is accessed through a number of avenues. Some individuals are born into fortunate circumstances, while others have worked hard, exercised patience, and saved diligently for their first investment property. These young, sometimes inexperienced and smaller investors often start by flipping properties or refinancing under a buy-to-let strategy, gradually building their funds until they can either provide the equity to unlock funding or undertake full-scale developments themselves but this is usually over decades. Additionally, some individuals have cultivated a network through professional bodies, networking events, or even cold calling and meeting of the minds whereby an investor may not be from the real estate world at all and is looking for a good investment. These can be lucrative as they are generally looking for a return as opposed to being hands on. There are also circumstances where there is experience and a track record from an industry professional or an expat however may be short on funding or experience in the UK. Where there is a will, there is a way.

Regardless of the means available to you, your experience or track record, you may still be required to "qualify" and ensure you meet the necessary criteria before an investor will commit their funds to you, even more so if 100%.


Here are some of the high-level options used today:


Sources of Equity for 100% Financing:

Specialist Lenders and Government Schemes: Some specialist lenders and government-backed schemes may offer high loan-to-value (LTV) ratios, approaching 100%. However, these often come with stringent conditions and higher interest rates to mitigate the increased risk.


Private Equity and Venture Capital:

For certain property developments, especially those with high growth potential or innovative aspects, private equity firms or venture capitalists might provide the necessary equity. These investors typically seek higher returns and might demand significant control or profit-sharing agreements. Sometimes as high as 70% of the profit share.


Joint Ventures:

Forming joint ventures with other developers or investors can help pool resources to achieve 100% financing. This approach spreads the risk and allows for larger projects that might not be feasible for a single entity.


Crowdfunding:

Property crowdfunding platforms enable multiple investors to contribute smaller amounts towards the equity required. While not common for 100% financing, it can significantly reduce the equity burden on the primary developer.


Why is it Difficult to Find 100% Financing?


High Risk for Lenders:

Providing 100% finance means the lender is exposed to the full risk of the project. If the property value decreases or the project fails, the lender could face substantial losses. Consequently, lenders prefer lower LTV ratios to secure their investments with a safety margin.


Strict Regulatory Environment:

The UK’s financial regulatory environment emphasises risk management and prudence in lending practices. Regulators often discourage high LTV lending to prevent systemic risks and protect the financial system’s stability.


Economic Uncertainty:

Economic fluctuations, market volatility, and potential property market downturns make lenders cautious. In uncertain times, lenders tighten their lending criteria, making 100% finance less accessible.


Collateral Requirements:

Lenders typically require significant collateral to secure loans. Without sufficient equity or additional collateral, borrowers might struggle to meet the security requirements for 100% financing.


Higher Costs and Interest Rates:

If available, 100% financing often comes with higher interest rates and additional fees to compensate for the elevated risk. These costs can deter borrowers from pursuing such financing options.

Example


Consider a property development valued at £1,000,000. To secure 100% financing:


Specialist Lender:

Might offer a loan but require a higher interest rate (e.g., 10%-12%) and strict conditions (e.g., personal guarantees, detailed project feasibility studies, previous projects).


Private Equity:

Could invest £1,000,000 but demand a significant equity stake and profit-sharing agreement. Sometimes requiring preferred interest of 15% -18% per year over and above a profit share.

Joint Venture: Partnering with another developer who provides half the equity, each contributing £500,000.


Crowdfunding:

Raising £1,000,000 from multiple investors, each contributing smaller amounts, possibly through a property crowdfunding platform.


Securing 100% financing is challenging due to the inherent risks and stringent conditions imposed by potential financiers. Borrowers often need to explore multiple sources and innovative structures to achieve full financing. It is almost a chicken and egg scenario. Funders want experience and a track record however you require the funding to build such. With the current economic climate some equity lenders have decided to freeze new business and work with those to which they have a history or wait until interest rates reduce further. Even if all criteria are met, you may still be required to have "skin in the game," or find a "unicorn" of a deal, so be prepared to provide some form of equity or really negotiate your network to obtain a deal. However, it is not an insurmountable task.


Consistency and determination are key traits among those who succeed. You must be prepared for multiple rejections and persist even when it seems no one is willing to lend you money or provide you with off market deals with reduced asking prices. Many people can offer a product and numbers that stack but it also comes down to the intangible aspects, vision, prowess and synergy. Frustration and moments of doubt are part of the journey, but a good deal is only one component of the larger process of securing funding. A track record and experience also play crucial roles. The perfect deals does not exist. It is about relationships as much as the numbers. Often, hard work creates opportunities, and with a bit of luck, you will find the right partner who believes in you and your vision and funds your projects.


The UK requires a significant influx of housing, and numerous small and medium enterprises (SMEs) are eager to get involved. I have worked with companies that, despite being turned down hundreds of times in their start-up phase, eventually secured the funding needed to realise their vision. It is a long journey that demands consistency and self-belief, but continuing to engage with potential financiers will eventually pay off. Your next email, feasibility study, or phone call could be the breakthrough you need.


References:

Knight Frank Wealth Report 2024

UK Government Property Funding Schemes

Property Crowdfunding Platforms in the UK

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