The ongoing Brexit saga has had a ripple effect on most, if not all, UK industries. If we are to narrow in on the finance sector, we have seen the economic and political uncertainty act as an incentive for investors to explore alternative markets that are not just safer, but also offer stronger returns.
Playing perhaps the most important role here are the low interest rates, which have remained at 0.75% since August 2018.
As a result, particular avenues of investment such as development finance have grown in popularity; not only can this form of investment typically offer reliable returns, but it also makes investors’ money work harder without requiring them to commit to long-term investments. But the benefits naturally extend beyond the investors themselves. Indeed, they have the potential to support housebuilding efforts across the country and ultimately help address the ongoing housing crisis.
With the real estate market feeling the strain of Brexit uncertainty, development finance could be the stabilising force needed to buoy the sector.
In saying this, however, there is still a distinct lack of awareness amongst investors and consumers alike, in terms of the potential returns on offer from development finance. So how, then, can development finance help support the ambitions of investors, whilst also offering a boost to the wider UK property market?
What does development finance have to offer?
As the term suggests, property development finance describes a form of loan used for property development – whether this is refurbishing an existing house or building a new development from the ground up. In general, such loans are typically offered on a short-term basis and have a pre-defined exit strategy. One type of development finance in particular that is quickly growing in popularity is debt investment.
At FJP Investment, we’ve witnessed first-hand the increasing number of people moving to debt investment as a means of achieving regular, fixed returns. Indeed, 30% of the 950 UK investors we recently surveyed said that it was precisely these characteristics that they considered the main strength of debt investment.
To offer some more insight, loan notes (the instrument by which debt investments are agreed) have a predetermined date of maturity, meaning that investors don’t have to worry about a sophisticated exit strategy. Rather, the capital is provided to the developer upfront and the principal is repaid, with interest, by a set date. This means that investors can expect reliable returns and a clearly defined exit strategy.
What is the role of development finance in solving the housing crisis?
While Brexit has naturally dominated the headlines in recent years, the unresolved issue of the housing crisis remains festering beneath the surface. According to current forecasts, the UK needs to build approximately 300,000 new homes a year by the mid-2020’s if we hope to address the chronic undersupply of housing.
One of the most pervasive reasons why demand continues to outstrip supply is that developers – particularly SME developers – cannot access the finance required to drive housebuilding projects. According to a recent survey, 57% of small developers identified access to finance as the biggest obstacle they currently face. This comes in amidst a climate where many traditional lenders like banks and other high street lenders are reticent to loan money, with developers like these unable to get the funding they need to carry out these vital construction efforts.
This shortfall in investment for construction projects and property developments suggests that the market is yearning for alternative sources of finance – a gap that development finance is primed to fill. This financial instrument allows developers to access private finance, using it to construct more homes and scale their operations to the benefit of the wider public.
At the same time, development finance can be employed to utilise existing housing stock and make the most of homes that would otherwise sit empty.
Development finance is commonly used for refurbishment purposes in order to repair properties that sit in a derelict state – with the hopes of then putting them back onto the market to resell at profit. The incentive for investors is clear, but it also represents a way to make use of existing housing without having to rely solely on the completion of new-builds to meet targets.
Development finance shows real promise in terms of its potential to stabilise the real estate sector. It’s positive to note, therefore, that its popularity is growing steadily; according to the aforementioned FJP Investment research, 9% of UK investors currently hold some form of debt investment, with 20% considering doing so in the coming 12 months. Could this offer some much-needed relief to the property sector and ultimately work to support nationwide housebuilding efforts?