Development finance: Luring lenders in an evolving market | Fieldfisher
Skip to main content

Development finance: Luring lenders in an evolving market

Economic, political and social pressures have recalibrated the expectations of funders in the real estate market, forcing developers to adapt significantly and swiftly. Fieldfisher partners Helen Andrews, Phil Abbott and Iain Thomas consider which assest classes are proving to be most attractive to lenders, and why. 
Development finance has been one of the sectors most affected by the last decade of economic stagnation, political uncertainty and cultural change.

While bricks and mortar retail has been perhaps the highest-profile casualty of such shifts, these macro trends have not all been bad news for the real estate market.

Low interest rates have made borrowing cheaper, the weak pound has encouraged greater participation from overseas investors, and the expansion of some alternative asset classes has added diversity and buoyancy to both the commercial and residential real estate segments.


To date, the hotels sector has remained a resilient pocket of development financing activity.

Developers are continuing to invest in constructing and renovating new sites, financed by traditional lenders that have otherwise retreated from real estate, and leading British and international chains are queuing up to operate many of the new hotels.

According to figures released in December 2019 by Lodging Econometrics, London had the largest pipeline of hotels under construction of any city in Europe in last year, with 82 hotels and 14,007 rooms in development.

Student accommodation

Student living has been another standout performer, attracting international investment as universities and private landlords have sought to capitalise on growing student numbers to construct new and modernise existing accommodation.

Estate agency Knight Frank estimates that purpose-built student accommodation in the UK was worth £50 billion in 2019, with more than 600,000 beds available for the start of the 2019/2020 academic year.


In the private rented sector (PRS), the number of build-to-rent (BTR) residential schemes across the UK has continued to expand, with especially strong growth in London’s commuter belt and other major UK cities.

However, anecdotal evidence suggests that many lenders are still wary about the relative novelty of this model.
One of the reasons some BTR developers have reportedly found it harder than anticipated to secure funding is that the newness of the model means there is still relatively little data available on the return on investment (ROI) of such schemes.

Many lenders are continuing to monitor the progress of early schemes with a view to potentially entering the market in the future.

Senior living

In the senior living bracket, care homes, assisted living and retirement properties have moved on from a few years ago, when these were tipped to be hot markets for development financing.

Conservative lending and a lack of understanding of senior living models meant that this market did not take off in the way some had expected, although US funds in particular have come in to fill some of the financing gap for UK care homes.

Investment in retirement living is expected to return to growth in the future, but this model is unlikely to appeal to all types of lender.

Purpose-built retirement accommodation tends to be high-specification and aimed at reasonably wealthy people in the 55+ age bracket, so its premium price tag relies on a strong underlying housing market to ensure retirees are able to monetise existing assets to pay for these properties.

Such schemes typically suit long-term equity investors, such as insurance companies and pension funds, with long-term life funds to deploy, as opposed to banks or private equity funds, which require a quicker ROI.


In traditional commercial real estate, well-documented issues with retail store occupancy as shoppers increasingly make purchases online, together with the impact of business rates, have created an acutely challenging environment for development financing.

However, warehousing and distribution centres for online retail are attracting significant attention from lenders, with both new developments and conversions of existing commercial premises proving to be particularly active niches.


Office space has had a less bumpy ride than retail, with landlords adapting quickly to changing working practices, and despite (so far as the City of London is concerned) fears that Brexit would severely damage this sector.

However, the tribulations of co-working behemoth WeWork have created some anxiety about the shared workspace model.


Where traditionally built hotels, student accommodation, BTR and build-to-sell (BTS) have generally been able to secure lender backing, anything with an eco-friendly or carbon-neutral tint has historically been challenging to fund.

This is because construction costs are high, meaning the developer has to borrow more than they would for a traditional build, and it is often far from clear whether they can recoup those costs in the final gross development value (GDV) of the asset.

Over the next 10 years, this may change, as political pressure forces more eco-friendly construction practices and Millennials, who value environmental credentials more than previous generations, become older and wealthier, and may be willing to pay a premium for low-carbon property.

In the residential sector, government plans to ban gas boilers in all new builds from 2025 may also make residents more conscious of energy efficiency, since electric heating tends to be more costly than gas.

Economies of scale will also kick in, as eco-friendly modular building practices become more common, bringing the square metre price of low-carbon buildings toward equivalence with traditional builds.
What are lenders looking for?

Track record

For all lenders, the key differentiator they will look at before entering a partnership is the track record of a developer.

Most will only lend to developers with experience and a history of successful projects.

Contractor risk

Wider economic factors have created high levels of contractor risk, so lenders will want to conduct forensic due diligence on the financial health of any contractors and possibly take a performance bond as a guarantee against the contractor’s failure to meet its obligations.

Revenue security

Traditional lenders also want security that there will be a secure income stream, such as long-term tenants, or an exit for when the development is built. A loan agreement will almost always contain pre-sales or pre-letting requirements for this reason.

For hotels, the lender will require the developer to have lined up a reliable operator or a franchisee with a good history.

Banks do not want to take speculative development risk. Debt funds may be more willing to take a greater degree of risk, but they will charge a lot more for the privilege.

Efficient land-use

Evidence also suggests that lenders are wary of developments that require a lot of land, preferring to finance projects that combine high density with high desirability for residents.

There is also increasing pressure to build residential property in well-connected areas that do not necessarily require parking spaces – especially as city centres start to penalise owners of more-polluting vehicles and encourage greater use of public transport, electric mobility and ride-sharing.
Outlook for development finance

It remains to be seen how the real estate market will react to policies put forward by the new Conservative government, which was elected with a large majority in December 2019.

In the quarter running up to the election, it was clear that many lenders were refraining from deploying capital and that transactional activity had largely been put on hold.

Early indications are that the market is responding positively to the improved political certainty, although concerns about Brexit remain high on the agenda for many in the construction sector.

A large proportion of the UK’s construction workforce and building materials are sourced from Europe, which could leave yawning gaps in contractors’ capacity to deliver projects – at a time when demand for residential property in particular shows no sign of slowing down.

While woes in the retail market look set to continue for the foreseeable future, many alternative asset classes are expected to carry on performing strongly.

Under pressure to meet housing targets, local authorities are eager for more residential property to be built, especially affordable and social accommodation, but budget constraints mean they rely heavily on the private sector to deliver this, which is not happening fast enough.

This may result in more creative kinds of development finance and sales strategies being deployed in the future, with local authorities forming joint ventures with developers to co-fund and ultimately co-own PRS, BTS and senior living schemes.
How can we help?

Lawyers’ role in these trends, however they develop, is to help streamline transactions and take some of the complexity out of alternative asset deals, making both sides more comfortable with non-traditional projects.

As well as assisting with due diligence, security, searches, planning considerations and contract review, lawyers can help manage practical issues over the course of a real estate project.

The nature of real estate development is that the asset will change over the course of a loan, so issues may arise at the asset level after the due diligence is signed off, which are relevant to the decision whether, and how, a lender should enforce their rights given the alteration in circumstances.

In default situations, lawyers can offer pragmatic advice on how to approach instances where development loans are about to fall or have fallen into default, and the factors that need to be considered when lenders make a decision whether to enforce, or to work with the borrowers to revise their exit strategies.
For more information on our development finance expertise, please contact one of the authors or visit the real estate finance and construction pages of the Fieldfisher website.

Areas of Expertise

Real Estate