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NGExpert financial copywriter
Page written by Chris Godfrey. Last reviewed on July 15, 2024. Next review due 2025.
Developing property for resale or to retain as an investment or for your own residential needs can be a great way to generate income or move up the property ladder. However, South African real estate development can be costly, and many potential developers lack sufficient funds to pay in cash. Fortunately, there’s a way to solve this problem – development finance provides special loans to purchase land and pay Bill the builder and Scott the sparky. Don’t let the lack of cash limit your ambitions. Check out a tailor-made development loan and get busy building.
Development finance is a term for loans used to support the costs associated with a residential or commercial development project. Unlike long-term property mortgages, development financing is typically short-term, with lifecycles in the range of 6-24 months. Loans can be used to buy land and pay for construction costs, and they are suitable for ground-up new builds, conversions or refurbishments of existing properties.
A word from Andrea
"Due to the costs associated with real estate development and many property developers requiring cash to complete their projects, development finance is becoming an increasingly popular option to fill this gap. Development finance provides special loans to purchase land and pay your contractors."
Property development finance assists with funding a residential or commercial development. Unlike regular home or commercial mortgages, where a loan is taken out to buy an existing property, development finance is used to build a new property or to renovate or convert an existing property. Because the development property does not yet exist (new-build), or it is going to be significantly changed from its current condition (refurbs and conversions), development loans are granted on the cost of the development as well as the projected future value of the property when it has been completed. In all cases, LTC (loan to cost – the size of the loan against the total deal costs) and LTGDV (loan to gross development value – the size of the loan against the end value of the property once constructed), the borrower’s previous track record in the sector and their ability to repay the borrowing are all considered during the assessment of loan applications.
With development loans, interest is usually rolled-up or capitalised. This means that the interest charged by the lender is added to the loan balance rather than paid as a monthly instalment. This means there is no drain on cashflow during the construction period and the total interest charged is paid when the properties are sold or refinanced to repay the debt.
Development finance facilities are all unique, there is no one size fits all facility. They are tailor-made products specifically designed for different types of development and created bespoke for each scheme a developer undertakes. Development finance loans can be used for the following purposes:
Some development projects may require a mix of different loan products, (for example, new-build mixed with conversion of an existing structure), or the developer (borrower) may be unsure as to which kind of financing to apply for. Professional opinion is advised in such circumstances.
There are multiple steps in any development finance deal. A typical transaction looks like this:
Most lenders will require a substantial file of documents from the borrower at the time of application, however we work with our clients to make this process as painless as possible. Having all your ducks in a row will enhance the potential for successful project funding. Every lender will have their own proprietary criteria for documentation, but key paperwork includes:
Whilst experience is preferred for most lenders, if you’re a first time developer there are options available to you too.
Development loans start from as little as R200,000. Different lenders have various upper limits. Our team of experts can provide you with options up to R50 million.
Interest rates vary from 7% to 15% APR, however, as development loans are short-term, the amount of interest charged is of lower importance to the borrower than the total deal costs (fees, etc) and the loan covenants (terms and conditions), that a lender will insist upon. This is where our team of commercial finance managers will guide you through the various options available to you. The cheapest rate isn’t always the most competitive overall deal.
Fees vary according to each loan and the specific set of circumstances surrounding the deal. Typical fees included in development financing are:
Use this simple calculator to understand how much you could borrow and how much it will cost.
Property security
Initial loan (day 1)
Construction loan
Interest
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
Facility overview
Loan term
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Total facility amount
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Annual interest rate
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Initial loan (day 1) interest allowance
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Construction costs loan interest allowance
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Available balance
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Breakdown of loan facility
Gross initial loan (day 1)
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Gross LTV
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Arrangement fee (2%)
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Net initial loan (day 1)
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Construction
Loan facility (100% costs)
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Project overview
Current property value
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Total development costs
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Gross development value
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LTGDV
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LTC
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Exit fee (2%)
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Developer's equity contribution
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Profit
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Profit on cost
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GDV per unit
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GDV per square foot
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Construction cost per square foot
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Unlike regular home or business mortgages, development loans are paid out in stages from an agreed loan pool. Lenders will typically limit the funds they are willing to provide to no more than 70% of land purchase costs, and up to 90% of the construction costs.
Here’s an example of new-build development finance:
With most development loans, interest is only charged on funds that have been drawn from the loan pool.
Most South African property development finance options cap out at a maximum of 60-80% of the total deal value. However, 100% development finance may be achieved if: 1). The borrower enters a joint venture with a financier who is willing to provide lending to the total deal value in exchange for interest and a share of the profits. 2). The borrower offers additional collateral as make-weight security in lieu of a cash contribution.
To find out if 100% financing is an option for you, please contact us today.
Yes. Most lenders would expect to see full planning permission in place before issuing a formal offer of finance and instructing solicitors to commence legal due diligence. However, some niche lenders may proceed to legal due diligence if outline planning permission has been obtained, but they will only draw down the loan facility once full planning consent has been achieved.
Yes. Although a lack of previous developer experience may make it more difficult for first-timers to borrow the funds they need, financing may be possible from niche funders, or from mainstream lenders if the first-timer teams with an experienced developer to co-manage the project.
Probably. There are development loans available for borrowers with bad credit, or even no credit. Even if you’ve been turned down elsewhere, we may still be able to secure the funding you need. Contact us now for a confidential discussion about your project and how we can help.
Bridging finance is a short-term loan used in real estate development to cover the timing difference (or gap) between one property related transaction and another.
Development loans may be classified as ‘commercial’ or ‘residential’. How do they compare?
| Loan feature | Commercial loan | Residential loan |
| Purpose of loan | Development of property for business or large-scale residential use. (May be mixed – use with business units mixed in with dwellings) | Development of property for residential use. Usually a single residence or a small number of units |
| Maximum loan value | Up to 70% of land and 70% of build costs | Up to 70% of land and 90% of build costs |
| Term of loan | Until development is complete, typically 6 to 24 months | Until development is complete, typically 6 to 24 months |
| Interest rate | 4% to 15% APR | 4% to 15% APR |
| Regulated or unregulated | Unregulated | May be regulated |
| Exit strategy | Sale of property upon completion repays debt, or the property is retained and leased out, which will require the borrower to refinance with a long-term mortgage | Sale of property upon completion repays debt, or the property is retained and leased out, which will require the borrower to refinance with a long-term mortgage |
Exit strategy is an important element of any property development financing. Because most commercial developers intend to sell the completed property to repay the loan, lenders will typically expect to receive a strong sales and marketing plan as part of the application process. In contrast, residential development projects seek to build a home for the developer, or a small number of units for sale. This difference reduces the marketing need and can make it easier to obtain a residential development loan than a loan for purely commercial purposes.
For commercial property developments, if the property is being constructed for self-occupation lenders would expect the exit of the development loan to be in the form of a refinance on to a commercial mortgage. Our team of commercial finance managers will be able to arrange this for you. If the commercial development is to be occupied by a 3rd party tenant, then the lender would expect to see a pre-let agreement during the underwriting process to provide confidence that a long marketing period will not be required to attract a new tenant to the completed building.
Joint venture (JV) property development finance describes a partnership between a developer and a financier who is willing to fund up to 100% of the total deal value in exchange for a share of profits when the property is sold, plus interest on funds loaned. Most JV deals work using a special legal tool called a special purpose vehicle – or SPV. (Sometimes call a special purpose entity or SPE). This is a temporary holding company that acts as legal entity and funds-holder during the life of the project. Borrowed funds are repaid when the property is sold, with surplus funds (the profits) being shared between developer and financier. Typically, the profit share in a joint venture is 60% to developer and 40% to financier but can be negotiated.
A form of bridging loan, development exit finance is granted to a developer after the project is complete, but not yet sold or refinanced with a long-term mortgage. Lenders expect development loans to be repaid in full when a project is completed, yet it may take time for the developer to sell the property or to obtain a mortgage. To bridge this gap, lenders may provide development exit finance which repays the more costly development loan and remains in place until income from unit sales or a long-term mortgage are available to repay the exit loan in full. Exit loans can sometimes attract a lower interest rate when compared to development finance, so it sometimes makes sense to refinance immediately on completion on to a more cost-effective solution.
Development finance can be obtained from a range of lenders – major banks, investment companies, independent financiers, specialist property lenders, etc. Every funder will have their own lending criteria. Some may want a fully-fleshed out plan and a mountain of documents, others may simply want a valuation and look at your credit score. Finding the best loan for your development is a crucial as finding the best builders and carpenters, so it pays to shop around when looking for a loan.
Standard options to repay a development loan are:
Even seasoned property developers can get caught in loss-making projects, so the first-timer or minimally experienced developer should consider any project with great care before applying for funding.
The first thing to consider is the development itself:
If you can positively answer all the above, you are ready to approach lenders for funding. But first:
Loan and application documentation can vary significantly. Getting the right loan with the right paperwork at the right price and at the right time is critical to a developer’s success. Contact Swoop to arrange a confidential discussion about your financing needs. Begin with the best deal to give your project the best start possible. Get started today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.
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