"The cost of borrowing has exploded in recent months, so it’s good to see that despite two further increases to the base rate, the cost of financing development has seen only the most marginal increase since the first quarter of this year"
Sirius Property Finance has created a quarter-to-quarter snapshot of the development finance market to illustrate how loan conditions such as interest rates and fees have changed between Q1-Q2 2023.
Development finance usually takes the form of short-to-mid-term loans, providing finances with which to build property. As such, the cost of development financing has a direct impact on the nation’s rate of development and house building.
The market snapshot shows that the basic cost of development finance has increased by just 0.1% on the quarter, with the average interest rate rising from 12.1% in Q1 to 12.2% in Q2.
An average set-up fee of 1.5% remains unchanged, as does the average exit fee at 1.1%.
While it’s surprising to see such minimal change despite the wider UK economic backdrop, lenders do appear to be taking some additional caution by decreasing the maximum available loan by an average of £333,000 so that it currently stands at just over £9.5 million.
In terms of loan prominence, senior debt - debt that takes priority over other unsecured or more "junior" debt owed by the issuer - is the most common, accounting for almost half (48.5%) of all development financing in Q2.
Stretched debt (26.5%) and mezzanine (10.3%) are the next-most common types of loan.
Head of Corporate Partnerships at Sirius Property Finance, Kimberley Gates, commented:
“The cost of borrowing has exploded in recent months, so it’s good to see that despite two further increases to the base rate, the cost of financing development has seen only the most marginal increase since the first quarter of this year.
"While the current domestic news cycle is taken up by the cost of living crisis, it’s important to remember that we remain in a time of housing crisis too. Therefore it’s vital that ongoing housing development keeps moving forward during this difficult time in order to sustain the ongoing demand for homeownership.”
