This is probably one of the most common and important questions when buying off-plan investment property of any type or sector: Student Accommodation, Residential, Care Home, Hotel rooms etc
Firstly, lets break it down into the two separate stages, where funds are required. Funds or a loan are required to purchase the land and secondly, funds (cash-flow) is needed to build the development.
Buying the land
The developer will set up an SPV so each development site has its own entity and funding/loans/deposits taken should all be ring-fenced by this SPV, so all monies are used exclusively for the development only.
Commonly the land is purchased with use of:
- Profit made from the last completed development
- A Bridge-Loan or similar
- An investor or consortium of investors seeking a return once the project is complete
- An investor or consortium that will buy the freehold from the developer
Building the project
Buyer-Funded: whereby the developer uses client funds for the build. When it comes to funding PBSA projects particularly, where the studios or en-suite apartments are to be sold to individual retail investors, the most common method is, Buyer-funded. It’s designed to work extremely beneficial for both parties. It’s cheaper for the developer to pay interest to the investor (avg.4% p.a.) than a bridge-loan or other forms of borrowing.
Bridge-Loan: a short-term loan used either until permanent financing has been obtained or money has been earned from profit e.g: completion of a project. The loans are up to one year and are high interest -however its immediate cash flow. The developer may use this type of lending either to buy the land initially, especially if the project is small and will be built within 12 months. Or to ‘bridge’ the gap between starting construction and X number of sales off-plan. Or towards the end of the project, once buyer-lending has been spent on build and they need that last tranche of monies to bring it to fruition.
Contractor funded: if a developer works with a large contractor to build-out the project, the contractor may provide funding. It may be full funding or a percentage of the build, dependant on how the project cost management has been structured.
Development Finance: companies that specialise in residential and build-loans only. A range of different types of finance to suit the developer: build to let, commercial; mezzanine.
Developer Self-Funded: while this may not be the most common way for a developer to finance a development – often there is not enough profit from one development to fund the entire next project – certainly a contribution of developer-funds could get into a project.
Peer-to-peer: a simultaneous investment model going on behind the scenes. Instead of the buyers funding the build, the developer will borrow from a company who has attracted “lenders” earning a fix-term interest paid monthly on the money they lend. The developer backs this borrowing with a tangible asset e.g.: land, property, personal and agrees a term the money will be returned (3 month – 5 years) in a developer’s case, it’ll be just after the completion of the development.
Combination: with a brief overview of the most common developer lending and funding options, it is often the case a combination of two of the above will be used to bring a project to fruition e.g.: Buyer-funded and contractor funding, or bridge loan and buyer-funding. At the very least the developer will have a contingency back-up plan with access to more funds if required, to either, get the project out of the ground on time or completed on time.