The 7 Phases of Development
Kuflink peer to peer lending has set up a development committee that reviews all the development projects every week. And when needed, we ask the borrowers to increase their equity in case we find that the costs are going beyond the original quote.
COVID-19 has affected almost every working sector. Therefore, it is no news that there has been an unexpected shortage of construction materials this year. Most people couldn’t have predicted the storm that has swept across the development sector. The UK government’s development goals are in jeopardy because of material shortage which has been caused mainly due to COVID-19 and Brexit.
Shortage in construction materials can also be traced back to the increased home improvement and building activities in 2020, specifically during the first lockdown across the UK. In addition, adjusting for the pandemic led to slow production of the construction materials from factories, and ever since, the supply chain has remained stretched.
Most developers have had to come up with creative methods to get around the additional customs paperwork, such as having to source more local materials. But, the fact remains the same that a lot of builders are dependent on imported materials.
Other than the domestic backlogs, there has also been a shortage of materials because of demand exceeding the labour supply. As a result, a few trades are hiking up their prices because of work overload. This condition is continuously constraining the production of specific products such as paints, adhesives and insulation, along with packaging for products, which is critical for developers.
There is also a shortage of lorry drivers reported by the Construction Leadership Council, which directly affects building sites receiving deliveries. There is a particular issue of transporters availability, and it is becoming a serious nationwide issue. This has caused extreme delays and has impacted a large number of project programmes.
How is the material shortage going to affect the UK developers and housebuilders?
If the material shortage continues to grow, it will be catastrophic for those working in construction with timber or steel frame. Both these materials are in short supply, which would lead to a rise in costs in the coming months. Developers undertaking refurbishment projects could also be affected by the increase in prices. The price of materials used for maintenance and repair work surged to 2% between March and April and rose by 11.2% between April 2020 and April 2021. In addition, building merchants are under immense pressure, which has left DIY projects in doubt, with sealants, paints and electrical parts being short in supply.
There are numerous key components for builders that are in high demand which can’t meet their volume of the order, like cement, steel, roof tiles, timber, plastics, plumbing items and plaster boards. Because of this high demand, low stock levels and long lead times, there is a surge in prices, especially with steel, paint, cement and timber.
Even with shortages, there is a way to navigate through this.
How to navigate through a material shortage in the 2nd half of the year?
· Plan in advance
Just like other construction projects, developers need to plan ahead. Planning in advance is the key, so you don’t get tangled in the mess of high prices and material shortages. There is an important point to keep in mind, especially over the summer when most people buy DIY and landscaping products, which places an additional burden on the supplies.
· Work with supply chain
You need to work closely with the supply chain. Also, you have to clearly communicate your requirements with the distributors, suppliers and builders’ merchants as early as possible.
The construction sector is growing and innovating with the use of modern construction techniques and factory building programmes. This is going to improve the production efficiency and quality. However, manufacturers will still be at the mercy of the market forces for construction material.
To sum it all up, the construction material shortage is becoming a serious and prolonged problem for UK’s developers and house builders. Therefore, as a lender, we have to be aware of the fact that the cost of development projects may change in the coming months. Also, we have to ensure that we are looking for ways to improve our lending criteria and offering to help developers with this situation.
Kuflink Property Development committee
Kuflink peer to peer lending has set up a property development committee that reviews all the development projects every week. Some of the members include our Head of Collections, Property Developers, a Builder, and a Royal Institution of Chartered Surveyor (RICS).
We also have an RICS build Appraisal calculator which uses the Building Cost Information Service (BCIS) database where we are able to use up-to-date benchmarking data to determine any adjustments needed based on current market conditions. And when needed, we ask the borrowers to increase their equity in case we find that the costs and or time are going beyond the original quote. Our committee identifies the progress of the development project using the ‘7 phases of development’ as mentioned below. See an actual example of a Development build that was funded by the Kuflink Peer to Peer platform.
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* Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IF ISAs and SIPPs and may be subject to change. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes. Please read our risk statement for full details.
What is better, Child Trust Fund or Junior ISA?
Child trust fund (CTF) is a tax-free savings product for children. These funds were available for children born between September 2002 to January 2011. However, now these funds have been closed.
All the below is subject to relevant legislation. This is for information only. Please always seek professional advice before acting. The tax depends on individual circumstances and may change in future. The value of your investment can go up or down and you may get less than invested.
What is a Child Trust Fund?
Child Trust Funds (CTF) were introduced in April 2005, designed to provide children with a financial boost when they reach 18 years of age. Also, the UK government contributed £250 and £500 to boost every fund. The CTF offered three options:
- Stakeholder CTF: this type of child trust fund puts the savings you make for your child into stock market investments. The rules meant that the charges were capped at 1.5% per year, and the money had to be invested in a variety of investments.
- Cash CTF: these child trust funds are quite similar to a cash ISA. With these accounts, you earn tax-free interest.
- Share-based CTF: these child trust funds allowed account holders to either choose an investment fund to put the savings onto the stock market or choose their investments.
How does a Child Trust Fund work?
The UK government sent vouchers to the parents for the funds as opening payment, with more contribution for children who belonged to low-income families. Once the child trust fund was opened, the parents or guardians could make additional payments of up to £4,260 every year. However, if they don’t pay the full £4,260, the remaining allowance cannot be rolled over to the next year.
Parents can also make deposits into stakeholder accounts through direct debit, cheque or standing order. Share and savings providers may vary, so parents have to check the kind of payment their providers accept. Once the child holding CTF turns 16, they can manage the funds themselves. However, they can’t withdraw the money until they turned 18. If the child becomes terminally ill before they turn 18, they can withdraw money out of their CTF account. In case of the child’s death, the funds will be passed on to the person who inherits the rest of their possessions and property.
How can a 16-year-old child manage their CTF?
When a child turns 16, they can manage their child trust fund. In order to do this, they can contact their CTF provider. Then, they can decide where the money is invested, change investment type, pick a different investment structure or switch providers. If a child does not wish to manage their CTF, then they can leave their parents or grandparents in charge till they turn 18, when they become eligible to withdraw it.
Why the government closed Child Trust Funds?
The child trust funds were discontinued in 2011 January and were replaced by the Junior ISA. By this time, the interest rate on child trust funds had fallen, while the charges for investments were high compared to Junior ISA charges.
The UK government does not pay any contributions for the Junior ISA. This means that the child only gets the money their parents’ deposit for them. However, in April 2015, the government of the UK made it possible for CTF holders to switch to flexible junior ISAs.
Should you switch from Child Trust Funds to Junior ISA?
There are a lot of reasons for you to make the switch:
- Junior ISAs offer higher interest rates.
- There are several Junior ISA providers in the market.
- Junior ISAs fees are lower. You may only have to pay an annual fee of between 0.5% and 1% compared to 1.5% with share-based CTFs.
- Most child trust funds do not allow new investments, while Junior stocks & shares ISAs offer a wide range of investments.
It is important to know that while you have Child Trust Funds, you will not be able to pay into a Junior ISA at the same time. So, if you want to subscribe to Junior ISA deals, you must transfer the child trust funds within 60 days of opening a Junior ISA.
How to transfer CTF into a Junior ISA?
Before you transfer to a Junior ISA, make sure you check your Child Trust Funds value, especially if it’s share-based. Also, it is good to check if the CTF has any exit fees or guarantees which might be lost if you transfer from the CTF.
After you have completed the check, you need to find a Junior ISA provider that fits your needs. Once you have the right Junior ISA for your child’s savings, you will have to complete the transfer form, which will require your child’s information and details about their Child Trust Funds if you are opening a stocks & shares ISA. You will have to specify where you want to invest the money.
Once you have submitted the form to the provider, they will complete the transfer for you. Typically, the transfer takes up to 30 days, and your CTF will then be closed.
How to find out if you have a Child Trust Fund?
If you are unsure about having a CTF, the HMRC has a dedicated service to know where a CTF is held. You will have to provide some personal information to track down your Child Trust Fund. But, first, you will need to set up a government gateway account.
Once you know where your CTF is, you will have to contact the provider, and if you are over 16 years old, you can get control over your account. It has been estimated that more than one million Child Trust Funds are ‘lost’ to their owners. This happens because most CTFs were opened by the HMRC either because the child’s parents didn’t do it or when families were getting child tax credit.
All the above is Subject to relevant legislation. This is for information only. Please always seek professional advice before acting. The tax depends on individual circumstances and may change in future. The value of your investment can go up or down and you may get less than invested.
*Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IFISAs and SIPPs and may be subject to change. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes.
What is a development loan?
Purchasing a property at a low price, developing it to increase its value to make profit, sounds like a good plan. However, in order to achieve this, you need to understand how development finance works to ensure you start right and take your development project in the right direction.
What is a development loan?
Development loans are typically between 12 to 24 months. They are designed to help with the building cost of a residential or commercial development project. This could be a ground up development, refurbishment, or conversion.
How Does a Development Loan Work?
Development finance has two main parts. First, funding is required to buy the development land/property and second, a development loan is used to cover the build costs. The second part of the development finance is generally drawn down in tranches (usually against a monitoring surveyors report or invoices of works undertaken). So no advance is given by the lender for this specific tranche unless a report proves the work has been done and there are no issues outstanding.
The development loan will usually be dependent on a sign-off from a Project Monitoring Surveyor (PMS), based on the project type, developer experience, and build cost. The PMS acts as the lender’s eyes and ears to ensure the work progresses on budget and on time.
They will also flag any potential issues there may be with the development or the site itself. An example would be where building materials costs have increased therefore, the original build appraisal will be out in terms of costs and or time. A lender would then need more equity to ensure the development will be covered by the original loan arranged. All issues have to be resolved before a loan tranche will be advanced by the lender for the works the builders have just done and prepaid.
The PMS will act for the lender, but the borrower will pay their costs.
Some clients will undertake the build themselves if they have sufficient experience and some will employ a contractor to undertake the works for them to ensure the build is of a suitable standard and within regulation.
The funding amount is determined based on an independent valuation report which provides three key things:
- Current open market value: the value of the property/Land as the current time
- The construction costs: this will be all the build costs for the development
- The gross development value (GDV) : the value of the property after the development has taken place and all works are complete
All lenders will have their own lending criteria but each deal is evaluated taking into account the value, build costs and proposed GDV. Lenders will look at the build, the developer, the security, valuations, build costs etc before deciding whether they can lend or not.
Here are some key points to help you understand development finance:
- Minimum loan size
Every lender has its own lending limit, which usually starts around £50,000.
- Loan to cost
In simple words, this is the cost or loan amount that is needed to undertake the project. A lot of lenders provide funding for up to 80% of the project. However, with high financing comes higher risks, which means high interest rates. So borrowers should be prepared to pay high-interest rates.
- Loan To Gross Development Value (LTGDV)
LTGDV is where money is lent against the predicted market value of the property once complete. This is one of the essential metrics to consider for investors and developers. The standard LTGDV tends to be 60% to 65% for lenders.
- Loan Term
Most lenders offer development finance for 12 to 24 months.
- Experience
Experience is very important for lenders, whether you are a Ltd company or a sole trader. Most lenders like to see your experience with similar development projects as this will demonstrate your ability to undertake the build.
All these details are put in the offer of funding. Once the borrower accepts the offer, the lender begins the formal process. Furthermore, the paperwork regarding loan is handled by both parties (borrower and lender) solicitors. After all legal formalities are completed, the funds are released to the borrower.
The repayment for the development loan is expected within the agreed term date. However, in some circumstances, borrowers might be able to get an extension for the repayment with additional charges.
Bridging loans
Bridging loans are short-term loans that are used for immediate cash flow. One of the biggest advantages of bridging loans is that you can secure funds fast.
With a bridging loan you can;
- Purchase a property quickly (maybe at auction): Unlike the high street lenders, bridging loan UK companies can offer loans quickly so you don’t have to lose the property you are looking for.
- Secure land planning permission: with bridging loans, developers can complete the purchase of the site while applying for planning consent.
- Bridging the gap between purchase or renovation of property: if you have made an offer on the house or your build project needs turnaround without delay. With bridging loans, you can seize all opportunities.
These loans can act as the initial step for development finance. Developers can purchase a property with a bridging loan and use a development loan for build work.
Paperwork needed for Development Finance
Paperwork is the most important part of the loan application. In fact, with development finance, there is more paperwork because the property’s future value is taken into account. For development finance, developers will need the following:
- The current value of the property or purchase price of the property if not already owned
- Predicted property end value along with evidence i.e. valuation
- The schedule of cost of renovations and building
- The complete schedule for development
- A copy of property planning permission
- Complete details about other professionals involved in the project
- All details of building regulation
- A portfolio to show experience in similar projects
- Any planning restrictions in place
- All details about the building regulations
- and more
Development Loan Example
Let’s say you are purchasing land on which you want to build multiple properties. The cost of the land is £150,000, and the predicted build cost is £600,000. With a bridging loan, you may get funding for up to 60% of the land purchase, and with a development loan, you may get funding for up to 60% of the build cost.
- Land purchase cost = £150,000
- Predicted build cost = £600,000
- Bridging loan = £90,000 for land
- Development loan £360,000 for the build
- Total Funding £450,000
Property Development 7 Phases
We have identified 7 Phases of property development. With this simple system, investors will be able to see the development project’s progress.
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* Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IF ISAs and SIPPs and may be subject to change. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes. Please read our risk statement for full details.
