Property conversion in London was made possible with a £950,000 bridging loan

Finance: £950,000 | Location: Addiscombe, London

New developers are often keen to add that first property to their portfolio, but inexperience can sometimes hinder or completely prevent them from carrying out a plausible and well-calculated project.

Bridging Loan in Addiscombe, Croydon

A new property developer starting in London saw an excellent opportunity to purchase a detached house in Addiscombe for £700,000, well below the market value of similar properties in the area. He planned to convert the property into three self-contained apartments.

The developer knew the three apartments would be of significant value once complete. The five-bedroom Victorian property was located near a popular tube station, making the location perfect for professionals working in and around London. 

It needed light renovation work and an extensive conversion, but once the project was complete, the Gross Development Value totalled £1.4m, an attractive profit for the new developer.

The new developer needed £950,000 in bridge financing to give him the necessary funding to purchase the property at £700,000 and then convert and renovate with the remaining £250,000.

The new developer had a well-considered, watertight project plan but needed to convince lenders he was a safe bet. 

Being new to the development industry, many lenders would always approach someone similar to our client with extreme caution, especially as he was looking to borrow a significant amount of money but had £225,000 in savings to put towards the project.

The developer had done his due diligence.n the London Borough of Croydon, 1343 apartments were sold in 2022 - the most of any other property type - it was clear that they were sought after and relatively easy to sell compared to detached, semi-detached or terraced houses.

The detached house was close to the Norwood tube station and Addiscombe train station, which the developer knew would make them much easier to sell.

The developer was looking to complete the project in 18 months, firstly to lower the amount of interest he needed to pay back and secondly, knowing he was new to the industry allowing himself more time in case there were issues as the project went forward.

How was the finance organised for the purchase and conversion?

During the process, our client had decided against pre-purchase planning permission, as he knew it would take up to three months, and the property owner would need to be informed. There was a significant probability that the number of lenders willing to take on this finance would be significantly reduced as a conversion proposal without planning can increase the risk to the lender. 

Despite the potential risks involved in this particular application, we did find a lender willing to take on the project, but under very specific terms. 

The lender was not prepared to lend the total £950,000 upfront because the developer was inexperienced but offered the loan in 2 stages. 

First, we provided an advance of 65% of the net loan, which equated to £455,000. The remaining amount of £245,000 needed to purchase the property came from the developer's savings. 

He then applied for planning permission which was granted within four weeks. Usually, planning permission can take up to 10 weeks to complete, so the speed of this application was favourable, considering the developer wanted to get underway with the conversion.

Interestingly, once the planning permission was granted, the property's value increased by 5%, enabling the developer to draw down 70% of the increase, which worked out at £24,500. 

Although a modest figure in this scenario, it allowed him to begin the conversion process. The first stage was completed in 6 months, which left another 12 months to complete the conversions to be on target for the developer's 18-month target.

Once the conversions were underway, we extended the bridging loan for 12 months and provided the developer with the remaining £250,000 needed to convert the detached house into apartments. 

The total bridging loan of £950,000 was secured against the GDV of the sale of all three apartments, totalling £1.4m. 

What happened when the bridging loan was complete?

The developer was able to complete the conversion within 8 months and managed to sell all three of the apartments for a very healthy £1.41m, £10,000 more than initially estimated. Each apartment sold for £470,000, a price that saw 89 apartments sold in 2022 (Data source: HM Land Registry).

For a first time project, the profit that the developer made was enough for him to be able to find another property and start the next project. 

How can a bridging loan provide financial options for new developers in London?

A bridging loan can provide options for new developers in London by providing them with the necessary financing to start and complete their development projects. London is a highly competitive property market. New developers may need help securing funding from traditional lenders like banks, especially if they have limited credit history or insufficient collateral.

A bridging loan is a type of short-term financing that can help bridge the gap between purchasing a property and the eventual sale or long-term financing such as a buy-to-let. This can be an attractive option for new developers because it allows them to access the funds they need to purchase and develop a property, even if they have a poor credit history or established relationships with lenders.

Bridging loans can also be used to finance the refurbishment of existing properties or to purchase properties not eligible for traditional financing due to their condition or location. This can be especially valuable for new developers looking to take on more challenging projects requiring higher expertise and investment.

In London, where property prices are among the highest in the world, bridging loans can provide new developers with a way to compete with well-established developers and investors for new properties. By providing quick access to financing, bridging loans can help them move quickly to secure properties, start their development projects and ultimately gain a foothold in the London property market.

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