Introduction to Planning Gain Finance
In the world of property development, timing and financial agility can make all the difference between a profitable venture and a missed opportunity.
This is where planning gain finance comes into play, offering a powerful option for savvy developers and investors.
Planning gain finance is a specialised form of short-term funding designed to help property developers acquire sites with significant development potential, even before full planning permission is granted.
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Understanding Planning Gain
What is Planning Gain?
Planning gain is a concept that lies at the heart of many successful property development strategies.
It refers to the significant increase in land or property value that occurs when planning permission is granted for development or change of use.
This concept is deeply rooted in the UK’s planning system, governed by the Town and Country Planning Act 1990, it’s this regulatory framework that creates the opportunity for planning gain.
The Value of Planning Permission
The impact of planning permission on property value cannot be overstated.
Land without planning permission is often valued based on its current use, which may be relatively low. However, once planning permission is secured, the value can skyrocket.
For instance, agricultural land might be worth £10,000 to £20,000 per acre.
But if planning permission is granted for residential development, its value could leap to £1 million or more per acre, depending on the location. Similarly, a commercial property with permission for conversion to residential use could see its value double or triple.
Planning Gain as an Investment Strategy
Astute investors and developers have long recognised the potential of planning gain as a lucrative investment strategy.
The approach is straightforward in principle:
purchase land or property at its current use value, secure planning permission for a more valuable use, and then either sell at a profit or develop the site.
This strategy allows investors to generate substantial returns without necessarily engaging in the construction process.
It’s a way to add value through expertise, vision, and navigating the planning system, rather than through traditional development activities.
However, it’s important to note that this strategy isn’t without risks.
The planning process can be lengthy, costly, and uncertain. This is where planning gain finance becomes an invaluable tool, providing the financial flexibility to pursue these opportunities while managing the inherent risks.
How Planning Gain Finance Works
Short-Term Bridging Loans Explained
Planning gain finance is essentially a form of bridging loan. These are short-term funding solutions designed to ‘bridge’ the gap between a property purchase and a longer-term financial arrangement or sale.
Typically ranging from 3 to 36 months, bridging loans in the context of planning gain finance provide the quick capital needed to secure land or property while the planning permission process unfolds.
This speed and flexibility are crucial in a market where attractive development opportunities can be snapped up quickly.
Key Features of Planning Gain Finance
What sets planning gain finance apart is its adaptability to the unique challenges of property development.
Unlike traditional mortgages, planning gain finance embraces the potential of undeveloped or underdeveloped sites.
This type of pre-planning bridging finance can be used for a wide range of property types, from residential and commercial buildings to bare land and brownfield sites.
It’s particularly useful for properties that might be considered ‘unmortgageable’ by conventional lenders, such as derelict buildings or land without planning permission.
Typical Terms
The terms of planning gain finance are structured to align with the anticipated development time-frame.
Interest rates are higher than standard bridges, reflecting the increased risk and short-term nature of the loan. Rates can range from 0.44% to 1.5% per month, depending on the specific circumstances of the project and the borrower’s profile.
One of the most useful features of pre-planning development finance is the ability to ‘roll up’ the interest.
This means that instead of making monthly interest payments, the interest is added to the loan balance and paid off when the loan term ends. This can be particularly beneficial for developers, as it allows them to preserve cash flow during the critical planning and development phases.
Who Can Benefit from Planning Gain Finance?
Planning gain finance is available to a wide range of applicants, reflecting the diverse nature of the property development sector.
These include individuals, partnerships, limited companies, Special Purpose Vehicles (SPVs), trusts, and pension funds.
Most lenders require applicants to be at least 18 years old, with no upper age limit.
While primarily aimed at UK residents, many lenders also offer solutions for expats, foreign nationals and offshore companies, broadening the scope for international investment in UK property development.
Suitable Property Types
One of the strengths of planning gain finance is its versatility when it comes to property types.
This form of funding can be used for:
- residential properties with development potential
- commercial buildings ripe for conversion
- bare land in strategic locations
- brownfield sites awaiting regeneration
- and mixed-use developments.
The key factor is the property’s potential for value increase through planning permission, rather than its current state or use. This makes planning gain finance an excellent tool for visionary developers who can see potential where others might not.
Experience Requirements
While pre-planning finance is accessible to a broad range of applicants, lenders typically favour those with a track record in property development or a strong professional team.
This is because securing planning permission and managing the associated risks requires considerable expertise.
Lenders will assess an applicant’s experience by looking at previous successful planning applications, completed development projects, professional qualifications in relevant fields, and the strength of the wider project team.
For less experienced developers, partnering with established professionals or providing a robust business plan can help strengthen an application.
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The Application Process
Applying for planning gain finance requires thorough preparation.
The key is to present a clear, well-researched proposal that demonstrates both the potential of the project and your ability to realise that potential.
Lenders will need proof of identity and address, detailed information about the property or land, and a comprehensive business plan outlining your development strategy.
They’ll also want to see financial statements or proof of income, details of your exit strategy, evidence of your development experience, and initial plans or sketches of the proposed development.
Property Valuation and Assessment
An important part of the application process is the property valuation.
Lenders will instruct a professional surveyor to assess the current value of the property or land and its potential value post-planning permission. This valuation helps determine the loan-to-value ratio the lender is willing to offer and provides an expert opinion on the viability of your development plans.
Lenders will also assess the likelihood of planning permission being granted, considering factors such as local planning policies, the property’s location, and any precedents for similar developments in the area.
Approval and Funding Timeline
One of the key advantages of planning gain finance is the speed of the process.
Planning gain finance can often be approved and funded within 7-10 days. This rapid timeline is essential in the fast-moving world of property development, allowing you to move quickly when opportunities arise.
To ensure the smoothest and fastest process, have all your documentation prepared in advance, be responsive to any additional requests from the lender, and consider working with an experienced broker who understands the nuances of planning gain finance.
Loan-to-Value (LTV) and Funding Limits
For planning gain finance, LTV (loan to value) ratios typically range from 65% to 75% of the property’s current market value.
This is largely inline with most bridging lenders who will offer 75% LTV bridging loans.
These ratios reflect the balance lenders strike between providing substantial funding and managing their risk. Remember, the property’s current value, not its potential future value, is used to calculate the LTV.
Min and Max Loan Amounts
Most lenders offer a minimum loan of around £50,000, making this type of finance accessible for smaller projects.
On the upper end, there’s no real set maximum, with lenders generally willing to consider larger amounts for strong cases with experienced developers.
Factors Affecting LTV
Several factors can influence the LTV a lender is willing to offer, including property type and location, your development experience, the strength of your exit strategy, and the current planning status.
Some lenders offer the possibility of higher LTVs, up to 100% in some cases, if additional security is provided.
Exit Strategies
Your exit strategy is not just about how you plan to repay the loan – it’s an integral part of your overall project plan.
A well-thought-out exit strategy demonstrates to lenders that you’ve considered all aspects of the project and have a clear path to profitability.
When formulating your exit strategy, consider multiple scenarios, market conditions, and your own goals and risk tolerance.
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Selling the Property Post-Planning Approval
One of the most straightforward exit strategies is to sell the property once planning permission has been secured.
This approach allows you to capitalise on the increased value without taking on the risks and costs associated with development. However, this strategy requires careful timing and market analysis.
Refinancing Options
Another popular exit strategy is to refinance onto a longer-term, lower-interest product once planning permission is secured.
This could involve transitioning to development finance, a commercial mortgage, or a buy-to-let mortgage, depending on your plans for the property and the size of the project.
Options When Planning is Delayed
If your planning application faces delays and your loan term is nearing its end, don’t panic. Many lenders offer the option to extend your loan term.
Here’s what you need to know:
- Extension periods typically range from 1 to 6 months
- You will need to pay an extension fee, often around 1% of the loan amount
- Interest rates might increase for the extension period
- Lenders will reassess the project’s viability before granting an extension
If an extension isn’t possible or doesn’t provide enough time, refinancing could be a viable alternative:
- Some lenders offer specific ‘planning bridge’ products for longer-term planning processes
- You might be able to refinance with a different lender who has more appetite for your project
Need some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
