Bridging the Gap
Here at Berkeley, we are firm believers in ensuring our clients are always aware of how we operate, how we protect our capital and how we generate yield in an ever changing landscape.
We have one goal: to generate yield.
One of the major ways we generate yield outside of managing assets and tangible businesses is bridging loans and development finance. On the face of it, these two practices may seem the same, however, they are two very different animals and we want to explain how.
Both involve lending money in return for a suitable interest rate and both involve securing the money against a physical property or property portfolio to ensure that our capital is protected. In many ways they could be seen as bespoke mortgages and they carry substantial benefits for Berkeley and ultimately our clients.
A bridging loan is often provided as a short term funding option to “bridge the gap” that will enable a property developer to pay off upcoming property transactions. Bridging loans are invaluable to developers, but are significantly more expensive than development finance or any other regular loan.
With bridging loans, developers will get a cash injection towards their project, however, the repayments are often above the market rates of a traditional loan.
Development finance is used primarily for property developments and is usually advanced as a loan that will come in stages and enable developers to purchase land or cover upcoming development costs.
The loan is based on a percentage of the gross development value (GDV), which is the expected sale value of the fully developed project. The loan is provided in stages throughout the development and payments are only released after regular site visits to confirm that the development is on schedule and requires the next injection of capital.
One of the other key differences is that bridging loans are typically for much shorter periods than development finance. While bridging loans can be for as short as three months, development finance could be provided for anywhere between 18 to 60 months.
At Berkeley, we use a mixture of projects both in terms of length and the nature of the underlying development, whether that be residential, commercial or mixed use. We understand the importance of having a diverse portfolio in order to mitigate risk and the importance for careful due diligence on all our projects.
If you have any questions about bridging loans or development finance, get in touch with the team today.
Justin is a practicing chartered accountant in the UK and the UAE and a member of the Institute of Chartered Accountants in England and Wales(ICAEW). Based in the Dubai Office, he assists in developing Berkeley’s operational corporate strategy, with a focus on retail clients.