What does 2020 have in store for development finance?
Paul Howells (pictured), chief executive of Accumulate Capital
Development finance has risen to prominence over the past five years.
While classed as a form of ‘alternative finance’, it is increasingly entering the mainstream, with more and more businesses and investors turning to this option.
Development finance is a short-term loan – fueled often through private investment – that is given to property developers.
For businesses, it provides important, fast access to development capital to fund a project; while for investors, there is the potential to earn competitive returns over a set period – an appealing factor in today’s low interest rate environment.
With demand for UK property rising, construction firms across the country are under pressure to ensure enough new developments are being built.
As such, the need for development finance facilitated through property development firms will become all the more pressing in the coming 12 months.
I explain why below.
Setting the scene
Over a decade ago, the global financial crisis tipped the UK, and much of the world, into one of the most significant economic downturns since the Great Depression.
The subsequent recession led to banks and traditional lenders becoming more risk averse, adhering to stringent lending requirements, which made it harder for businesses and consumers to successfully apply for loans.
While the financial crisis had a significant impact on the UK’s economy, the need for credit has continued to remain, precipitating a new breed of challenger banks.
This has been particularly prevalent in the property space – limited housing stock and burgeoning demand for property means that developers and construction firms are being placed under immense pressure to meet the nation’s demand for real estate.
In turn, these same developers are looking to lenders for the finance needed to fund their projects.
As was seen during the GFC, there is a chance that mainstream lenders could adhere to stringent lending requirements in 2020 which will make it more difficult for businesses and consumers to acquire loans.
For this reason, alternative sources of finance stand to be an attractive way of receiving capital, particularly for property developers.
Using development finance to solve the housing crisis
The need for non-traditional financing from firms able to pragmatically and attentively consider new developments on a case-by-case basis looks set to grow this year.
This will be to the loss of the heritage banking sector, which has historically tended toward blanket criteria that fail to see the potential of many prospective developments.
Additionally, the need for development finance could not be more pressing as the UK is still in the grips of a major housing crisis.
It is a huge issue that has taken a back seat to Brexit over the past few years, but this new government must prioritise tackling it.
It is estimated the country now needs 344,000 new homes to be built each year until 2031 to even begin solving the issue.
Failing to meet this target means that house prices will only continue to rise, pricing out many people from getting on and moving up the property ladder.
Despite the ever-receding impact of the recession, the need for development finance for SME construction firms today remains stronger than ever.
There are also benefits that go beyond the financial side of things.
Development finance links firms with investors keen to support a project by investing their funds.
Those property development firms responsible for facilitating the transactions can also become partners with the developers — helping with oversight to ensure projects continue as planned.
As with any sort of venture that has multiple funders, this is also crucial in ensuring that investors are aware of how a project has been progressing.
This personal approach is also part of the raison d’être of development financiers that allows them to find and fund projects that larger banks might fail to see the potential in.
So long as they continue to maintain a strong reputation as supporting excellent projects and developments, there’s no denying the important role development finance will play for investors and businesses alike in 2020.