When financing property development, both renovation and new build projects offer substantial opportunities for developers and Lenders alike.

While renovation projects are often perceived as the safer option due to their shorter timelines and more predictable nature, new builds typically provide the potential for higher returns, especially when executed correctly.

In this blog, we’ll explore why renovation projects generally carry less risk, while also highlighting why new build developments offer the opportunities for higher returns on capital.

The Scope of Work: Predictability vs. Opportunity

Renovation Projects:

Renovations tend to be more predictable for lenders, as they involve improving existing structures. Since the property already exists, much of the potential risk—such as structural issues, can be identified during initial inspections. Even though some unforeseen challenges may arise, they are often manageable with a well-prepared contingency plan.

For lenders, this predictability often makes renovations less risky. The scope of work is clear, and the value of the property can be more accurately assessed, ensuring the loan is secured against a known asset.

New Build Projects:

New build developments, by contrast, represent a blank slate, which can be both a challenge and an opportunity. These projects involve creating something entirely new, often from undeveloped land, and this carries a different level of complexity. However, the potential upside is significant. For developers and lenders alike, new builds offer the chance to create modern, highly desirable properties that meet current market demands, potentially generating higher returns than renovations.

While the process is more complex and requires careful management, a new build project that’s delivered on time and within budget can yield exceptional value for all parties involved.

Valuation and Loan-to-Value (LTV) Ratios: Lower Risk, Higher Returns

Renovation Projects:

Lenders typically find it easier to assess the value of a renovation project. Since the property already exists, an appraisal can provide a solid foundation for determining both the current and post-renovation values. This clarity helps lenders establish appropriate loan-to-value (LTV) ratios, reducing risk exposure.

Renovation projects often come with slightly higher LTVs as the existing property provides a tangible asset for securing the loan. The post-renovation increase in value can also make the project highly lucrative, with lenders having confidence in a stable underlying asset.

New Build Projects:

Valuing a new build project involves more forward-looking projections. With no existing structure to assess, lenders rely on market trends, the developer’s plans, and potential demand for the completed property. Although this introduces an element of uncertainty, it also presents an opportunity for significant appreciation.

For lenders, the key is conducting thorough due diligence. A well-located piece of land combined with a well-thought-out project plan can result in a higher final property value than a renovation project might achieve. This is informally known as a “new build premium”. While LTV ratios for new builds may start conservatively, the potential return on investment makes new builds an attractive proposition when the project is delivered correctly.

Risk of Cost Overruns: Manageable with the Right Planning

Renovation Projects:

One of the reasons renovation projects are seen as a safer investment is that their cost structures tend to be more predictable. Even though hidden issues may be uncovered once renovation work begins, experienced developers can often anticipate potential challenges and budget accordingly. Lenders can mitigate their risk by ensuring that developers build a contingency fund into their budgets.

Once the work is underway, the likelihood of substantial cost overruns is reduced, particularly with regular progress reports and close monitoring of the project’s finances.

New Build Projects:

New build developments are inherently more complex, and cost overruns can be a concern, particularly in the early stages. Issues such as land preparation, infrastructure installation, or rising material costs can add to the overall expense. However, these risks can be managed with the right planning and partnerships.

Experienced developers will often secure fixed-price contracts with suppliers and contractors to minimise the impact of price fluctuations. For lenders, working with seasoned developers who have a track record of managing large-scale projects can help ensure that new builds remain financially viable throughout the construction process. While new builds might have more variables, a well-managed project can still deliver exceptional returns.

Project Timelines and Cash Flow: Shorter vs. Longer Commitments

Renovation Projects:

One of the key advantages of renovation projects is their shorter timeline. Renovations typically take a few months to a year, allowing lenders to see a return on their investment sooner. The quicker turnaround also means less exposure to market fluctuations and economic uncertainty.

This shorter project duration means that developers can more quickly rent or sell the renovated property, improving cash flow and helping to repay the loan faster. For lenders, this reduces the risk of long-term delays or financial complications, making renovations a more secure option.

New Build Projects:

While new builds often have longer timelines—ranging from one to three years or more—they offer lenders the potential for a higher payoff. A longer commitment allows for greater customisation and the ability to create properties that align perfectly with current market demand. The construction of modern homes or commercial spaces in growth areas can result in strong market appeal and high sale prices.

For lenders, this means a larger return on investment, although it requires patience and careful project monitoring. Staggering loan disbursements based on project milestones can help mitigate the risks of delays, ensuring that the lender’s exposure is limited throughout the project lifecycle.

Market Sensitivity: New Builds for Growth, Renovations for Stability

Renovation Projects:

Renovation projects typically target established properties in mature markets. As a result, they tend to be less sensitive to market fluctuations, providing lenders with a more stable investment option. The demand for renovated properties, particularly in desirable locations, remains strong, and the existing property value helps ensure the loan is well-secured.

Even in slower markets, well-renovated homes or commercial spaces can attract buyers or renters looking for updated, turn-key properties. Lenders can feel confident that the project’s end value will closely match or exceed the initial projections.

New Build Projects:

New builds, while more sensitive to market changes, offer the potential for strong returns in growth areas. If market conditions shift during the development period, there may be more volatility, but in well-chosen locations, this can work to the lender’s advantage. For example, a property in an up-and-coming area or one that fulfils a specific demand—such as affordable housing or green energy-efficient homes—can attract buyers at premium prices.

For lenders, understanding the local market and the demand for new construction is key. When managed effectively, new builds can outperform renovations in terms of profitability, offering lucrative returns even if the upfront risk is higher.

Both renovation and new build projects provide valuable opportunities for lenders, but they come with different risk profiles. Renovation projects tend to offer more predictability and shorter timelines, making them a safer bet in many cases. However, new build developments, while riskier due to their complexity and longer time frames, offer the potential for significant rewards when executed properly.

For lenders, the key to success lies in thorough due diligence, a clear understanding of market conditions, and working with experienced developers. By managing the risks associated with both project types, lenders can finance lucrative ventures that yield strong returns.

Onyx Property Finance are experts in providing financial solutions for property investors. We are dedicated to keeping on top of market trends and ensuring our customers are kept informed of any changes that might affect their borrowing, projects, and investments – see our blog for all the latest insights.

Speak to an expert today and get property development finance to fund your purchase and build costs with fixed interest rates for the lifetime of your loan: info@onyxmoney.co.uk.