Financing the future: balancing risk in property development

Answer

Summary: The UK property development finance market is becoming more diverse, but lenders remain selective as they navigate construction, planning, valuation and repayment risks. Before providing finance, lenders assess a project's viability, delivery timetable, regulatory requirements, funding structure and exit strategy. They also use legal protections, monitoring processes and staged funding to manage potential issues. Understanding these interconnected risks helps explain how development finance supports projects from funding through to repayment.

The property development finance market has become increasingly diverse, with banks operating alongside debt funds and other alternative capital providers. This has widened the funding options available to developers, although access to finance continues to depend on the commercial viability of individual projects. High construction and borrowing costs, planning constraints and uncertainty over completed property values can make that assessment difficult, particularly where a development will take several years to deliver.

For lenders, these pressures affect both the delivery of the development and the repayment of their loan. A construction delay, for example, can increase interest costs, require additional funding from the developer and postpone the sales or lettings needed to support repayment. Lenders must therefore consider the construction arrangements, the developer’s financial resources and the proposed exit together. These connected risks help explain why lenders remain selective, even where they have capital available to lend.

A changing lending market

There was a reported £52.7 billion of new UK commercial real estate lending in 2025, the highest annual volume in a decade. However, around 60% of that lending involved refinancing, while development finance accounted for 16% of new lending. The headline recovery therefore needs to be considered carefully; increased lending against existing assets doesn’t necessarily mean that more new developments are proceeding.

The composition of the market is also changing. Banks now compete with a wider range of lenders, some of which can offer bespoke financing or accept risks that fall outside a bank’s lending criteria. For developers, this can provide greater choice over the amount of debt available, the speed of execution and the flexibility of the financing.

However, greater choice doesn’t remove the underlying constraints. High construction and finance costs, together with planning and regulatory requirements, are obstacles to commercial development. Capital may be available, but a project must still generate sufficient value to justify the cost of construction and funding.

Lender appetite also varies between sectors and individual schemes. Logistics, residential and student housing remain preferred areas for development lending. Even within these sectors, location and local demand remain important. A student accommodation scheme, for example, depends on demand from the relevant university and delivery in time for the letting cycle. Lenders therefore assess the particular project rather than rely solely on a favourable view of its asset class.

Construction and delivery

Development finance exposes a lender to the process of creating the asset against which it’s lending. An unfinished development may be difficult to sell, particularly if a purchaser must take on uncertain completion costs or resolve problems with the construction arrangements.

The lender’s initial assessment will therefore consider the construction budget, the programme and the contractor’s ability to deliver the works. An independent monitoring surveyor can help assess whether the costs and timetable are realistic, then report on progress as construction proceeds. Contingency allowances provide a further buffer against unexpected expenditure.

The building contract also matters. A fixed-price contract may give greater certainty over specified costs, but its protection depends on the contractor being able to perform its obligations. If the contractor encounters financial difficulties, the developer may still face the cost of appointing a replacement and dealing with delay. This illustrates why lenders consider both the contractual allocation of risk and the financial strength of the parties accepting it.

Timing can be as significant as the final construction cost. A delayed development may continue to incur interest while producing no income. In some cases, the delay may also cause the developer to miss a sales opportunity or a tenant’s intended occupation date. This is especially true with student accommodation, where timeline changes could delay occupation until the next academic year. Lenders consequently need to understand how much flexibility exists in the programme and whether the developer has resources available if the original timetable changes.

Planning and regulatory requirements

A development’s delivery timetable also depends on its planning and regulatory position. Planning permission may be subject to conditions that must be satisfied before particular works can proceed, while planning obligations can create additional costs. These requirements need to be reflected in the development budget and programme.

Building safety is a further consideration, particularly for residential schemes. In England, developments within the higher-risk building regime require the relevant building-control approval before construction begins. New higher-risk residential buildings also require the appropriate completion certification and registration before occupation. A building may therefore be physically complete while further regulatory steps remain necessary before it can generate the income anticipated by the developer.

Wales has some of its own building-control requirements, including a new regime that commenced in July 2026. Lenders and their advisers must identify the rules applicable to the particular scheme rather than assume that the requirements are identical across England and Wales.

An approval problem can increase financing costs, delay income and affect repayment. Regulatory due diligence therefore needs to inform the financing terms and timetable from the outset.

Valuation and the amount of debt

Alongside delivery, lenders must assess what the development is expected to be worth and how much debt it can support. Two common measures are loan-to-cost, which compares the loan with the development cost, and loan-to-value, which compares it with the relevant property valuation. For a development that’s still under construction, lenders may also assess debt against the anticipated value of the completed scheme.

These measures address different concerns. The cost assessment helps establish how the project will be funded, while the valuation assessment considers the protection available if the lender needs to recover its loan. Both depend on assumptions that may change during construction.

If costs increase while expected sale prices fall, the developer can face a funding shortfall at the same time as the lender’s security becomes less valuable. A development that appeared profitable when the loan was agreed may become much less attractive before completion. Lenders therefore test how the project would perform under less favourable assumptions, including delays, higher costs and weaker demand.

Lower leverage can provide a larger buffer against falling values, but it also requires the developer to contribute more equity. Too little debt may leave a scheme unable to proceed, while too much can leave limited room for unexpected difficulties.

The developer and the financing structure

Lenders need confidence in both the people delivering the development and the funding supporting it. The developer’s experience of completing comparable projects can provide reassurance that it understands the scheme and can respond to construction delays or other difficulties. However, delivery experience alone does not establish whether additional money will be available if costs increase.

The company taking out the loan may be a separate company established specifically to own the site and carry out the project. Its assets and financial resources may therefore be largely confined to that development. Lenders need to understand who stands behind this borrowing company and what support they’ve committed to provide.

The owner or investor backing the project is commonly referred to as the sponsor. It contributes investment alongside the lender’s funding and may also provide strategic oversight. The developer may fulfil this role itself, or work with a separate investor. Where the roles overlap, lenders still need to assess delivery capability and financial support separately.

This distinction becomes particularly important if the development needs further funding. A financially strong investor doesn’t automatically have an obligation to cover a shortfall. Lenders therefore consider the investment commitments, guarantees or other support agreed for the project, together with the ability of those providing that support to meet their obligations.

The choice of lender also affects the financing. Some debt funds and private credit providers can offer larger loans or more tailored terms, potentially at a higher cost. This may help a development proceed, but additional borrowing costs can reduce the margin available to absorb unexpected expenditure.

Where several lenders or investors participate, their interests may differ if the project encounters difficulties. The financing arrangements need to establish how payments, further funding and decisions will be managed, so that disagreements between funders don’t prevent an otherwise viable development from being completed.

A credible route to repayment

A development lender must consider how the loan will be repaid once construction is complete. The intended exit will commonly involve selling the property or refinancing it into longer-term investment finance.

Pre-sales and pre-lets can provide greater visibility over future proceeds or income. A building with an agreed tenant may be more attractive than one relying entirely on finding occupiers after completion. However, the tenant’s financial strength and the conditions attached to its commitment remain relevant. A pre-let also doesn’t remove the risk that construction will be delayed.

Refinancing carries its own uncertainty. A completed property must generate sufficient income and have sufficient value to support the replacement loan on the terms available at that time. The lender should therefore assess the proposed refinancing rather than assume that completion alone will make it achievable.

The strength of the exit links back to the other risks. Delays can increase the debt to be repaid, while weaker demand can reduce the sale proceeds or refinancing available. Lenders need to consider those possibilities together when assessing whether the repayment plan remains credible.

Managing risk through legal protections

Once the lender has assessed these risks, the legal documents help allocate responsibility and provide ways to respond if the project departs from the agreed plan.

Development loans are commonly drawn in stages, with further advances subject to conditions relating to expenditure, progress and the developer’s equity contribution. Information requirements and monitoring reports allow the lender to follow the development and identify emerging problems.

Security over the property and other relevant assets supports the lender’s ability to recover its loan. Collateral warranties and contractual step-in rights may also provide recourse against construction participants or help preserve important project contracts following specified events.

These protections have practical limits. Security over an unfinished building doesn’t provide the money needed to complete it, and step-in rights don’t guarantee that a replacement contractor will be available. Legal advisers therefore must consider how the rights would operate in the circumstances the lender is most concerned about.

If a development encounters difficulties, the lender may consider additional sponsor equity, an extension of the loan or a restructuring. Enforcement may also be appropriate, but selling an unfinished scheme could produce a lower recovery than allowing completion. Conversely, advancing more money can increase the lender’s loss if the project is no longer viable. The decision depends on the likely cost and value of the available options.

Final thoughts

Lenders are navigating the development market through selective lending, realistic assessments of delivery and repayment, and structures that allow problems to be identified and addressed during construction. A more diverse lending market gives developers greater choice, but the viability of each scheme remains central.

For legal advisers, understanding those connections helps explain why particular protections are negotiated and when they may be useful. As such, development finance requires multi-specialist teams to work together, supporting a project from the initial lending decision through to completion and repayment.

Georgina Low is a trainee solicitor at Winston Taylor.