Property Developers: Utilising auctions to increase property yield

Property auctions and property developers are like salt and pepper, you can use them separately, but they work better together. Property auctions (UK) allows developers to buy cheaper properties in need of refurbishment or that can be converted, to increase their yield. The latest housing statistics from the Office of National Statistics show the highest average property price increase in the UK since October 2014. It reached a high of 8.6% over the twelve months leading up to February 2021.

England took the lead as the region’s average property value rose to £268,000, 8.7% higher than the following year. Wales saw an annual rise of 8.4% (£180,000) and Scotland 8% (£162,000). With the potential to unlock thousands, now seems like the perfect time to invest in bricks and mortar.

Source: Office of National Statistics (ONS)

How property developers can utilise auctions

There are several ways a property developer can use auctions to maximise a property’s yield. These include:

  • Property quick fix
  • Converting a property from one dwelling into an HMO
  • Converting a large property into several separate residential dwellings or luxury apartments
  • Purchasing land from the auction and building a new property or properties to either sell on or rent out to receive a monthly income.

Download the MFS Guide to Buy-To-Let

Download the MFS Guide to HMOs

Issues facing property developers

On paper, property development might seem simple. You buy a plot of land and build a property on it, or you buy an existing property and renovate it. However, there’s much more to it than that.

Whilst the benefits of property development can be vast, there are often issues during development projects that investors need to take into consideration, particularly when purchasing at auction.

Typically, an individual or a company will borrow money to purchase the land and to finance the work that needs to be carried out. This is called development finance. Once the property developer(s) have finished building their property (from a block of flats, to a new housing estate, or an office building), then they repay their loan using the money made from selling the completed asset, or from the long-term finance solution they have organised – such as a BTL mortgage.

In some cases, however, there is not enough time. Schedule delays during the build can mean that developers may need to repay the original loan before the property is ready to be sold, or it may take longer than expected to find potential tenants or buyers. After all, property chains are very common in England, meaning a sale can be delayed because the buyer is also waiting to sell a property.

Tressle have stated that it is now taking 163 days to complete a mortgage, on average. For those looking to rent, the spring budget announcement from the government to back 95% mortgages has ignited a sudden increase from new buyers. The latest RICS Residential Market Survey for March 2021, provides evidence of increased market activity. Agreed sales rose from +7% to +50%, whilst new buyer interest saw a dramatic increase in net balance of +42% from the previous month’s 0%.

In short, the UK property market is growing from strength to strength.

Source: The Times

Source: Royal Institution of Chartered Surveyors’ (RICS)

What is a development exit loan?

When delays do hit, what can be done to help property developers? This is where alternative finance such as a development exit loan comes in. They are an increasingly popular form of bridging loan product, which acts as a short-term financial solution for developers coming to the end of a property project.

  • Will you be hit with a development finance extension fee? A short-term development exit loan from a bridging lender like us can be used to repay the existing debt, giving more time to complete the project, sell the property, and then repay the bridging loan.
  • Still no buyers? Developers can take out a development exit loan, repay the initial development finance they borrowed, and then when the sale does go ahead, the development exit loan can also be repaid.

There is another important factor here: cost. Development finance is often expensive. This is because the lender must account for the risk involved in funding the yet-to-be-started development work. And as mentioned, extending a loan can incur large fees. A development exit loan can therefore be cheaper than the original loan – by replacing the more expensive debt with a more affordable one and avoiding extra fees, the developer has the opportunity to protect their profits upon the eventual sale.

Bridge to exit

As with any property investment, there is always an element of risk. However,  there are people to help you in these situations, that can help prevent your investment from falling through, or encountering costly problems. For property developers, this risk factor is heightened. Developers are often hit with issues with funding, or delays from materials being out of stock, or schedules of work being delayed due to bad weather. They are unpredictable and often turn into financial headaches for property investors.

Our new development exit product can help. There are several reasons why this has proven popular with our clients:

  • We can arrange loans within days of receiving an enquiry. For a developer who must meet a deadline to repay their original finance, we can help.
  • Our bridging loans are flexible. The exact terms can be adapted to meet the needs of each client.
  • It buys a developer time. Whether more time is needed to finish the development or so a sale can go through, a development exit bridging loan can provide up to another 24 months for a project to be completed.

We know that every property and every sale is unique. That is why we use our expertise to assess each case on its merits. We can then tailor our short-term finance solutions to your requirements.

Looking for more information? Contact our team.

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