Capital

£22.8m Development in South London – Delivering Return on Equity

The Challenge for Developers

For developers, the ability to source the correct funding structure can be the difference between success and failure. One of the most important metrics we advise our clients on is ‘return on equity’. We believe within a development, developers must understand exactly what return they are achieving for the hard equity they are investing in their deals.

Structured Finance Advice for Developers

The P10 Team is experienced in helping property developers find the right funding solutions and navigate the murky waters.

When advising on Return on Equity (ROE), it is key to understand how the profit is affected in the capital stack. The general consensus is that the overall profit of the scheme reduces as the leverage increases and more funds are borrowed. However, the key is making sure that the ROE position increases. Let’s show you how this works on a live scheme in South London.

Highlight of Numbers:

55 Units

GDV - £22,800,000

Loan Agreed - £15,960,000

Leverage – 70% LTGDV

Margin – 5.29% over Base Rate

Purchase price - £7,400,000

Stamp duty - £359,500

Total Build costs – 9,500,000

Total Development Costs Pre-finance - £17,259,500

Estimated Interest – £1,658,658 (Sales modelled from month 18 at £3,000,000 a month).

Estimated Fees - £319,200

Estimated total finance costs - £1,977,858

Total development costs - £19,237,358

Net day 1 loan - £4,750,000

100% of build facility funded - £9,500,000

Equity requirement - £2,650,000 + Stamp £359,500 = £3,009,500

Profit After All Costs - £3,562,642

Profit on cost – 18.5%

Return On Equity – 118%

Understanding Numbers

As you can see in this scheme above an 18.5% return on cost does not deliver the greatest returns given the work involved in delivering a 55-unit scheme. But when you look at the return on equity metric then this makes the numbers look a lot more appealing.

Property development is never easy—if it were, everyone would be doing it. But with the right professional team in place, a bit of foresight, and you can build a desirable product, the stars can align. Just make sure your finance team is as sharp as your architect. Delivering the correct numbers on your scheme is key to making developments successful.

Conclusion

Do you need advice on how best to fund development projects? Are you looking for land opportunities for future development sites? Our specialists have years of experience and a growing network of landowners and specialist lenders.