Phased Development Finance: Funding Multi-Phase Building Projects

Phased development is the strategy of dividing a large construction project into distinct stages or phases, each of which can be built, completed, and potentially sold before the next phase begins. This approach is standard practice for sites of thirty or more units, but it can be applied to smaller schemes where market conditions or financial constraints make building everything simultaneously impractical. From a finance perspective, phasing fundamentally changes the risk profile of a project because it limits the lender’s maximum exposure at any point and creates opportunities for capital to be recycled from completed phases into subsequent ones.

Consider a sixty-unit residential development with a total GDV of £18,000,000. Building the entire scheme in a single phase would require a development finance facility of approximately £11,000,000 to £12,000,000 at 65% of GDV. This is a large facility that limits the number of lenders available and requires the developer to contribute £6,000,000 or more in equity. By dividing the scheme into three phases of twenty units, each phase requires a facility of approximately £3,500,000 to £4,000,000, which is within the appetite of a much wider range of lenders and requires significantly less equity upfront if sales proceeds from early phases fund later ones.

The financial benefits of phasing extend beyond reduced equity requirements. Building in phases allows the developer to test the market with the first phase, adjusting pricing, specification, or unit mix for subsequent phases based on actual sales performance. It reduces the construction risk because smaller build programmes are easier to manage. And it limits the developer’s exposure to market downturns, as completed and sold units cannot lose value regardless of what happens to the wider market. We have structured phased finance for developments across the UK, from small three-phase schemes in Surrey to large multi-phase masterplan developments in the Midlands and North West.

There are two primary approaches to financing phased developments. The first is a single facility covering all phases, with drawdowns structured to reflect the phased build programme. The lender commits to the full amount upfront but releases funds phase by phase, with conditions attached to the commencement of each subsequent phase, such as a minimum level of sales achieved on the preceding phase. This approach provides certainty of funding for the entire scheme but requires the developer to satisfy ongoing conditions, and the full facility amount must be committed from the outset, which limits lender options.

The second approach is separate facilities for each phase, arranged either with the same lender or with different lenders. Each facility is self-contained, covering the construction costs and any land allocation for that phase, with the proceeds from sales of completed units in earlier phases used to fund the equity for subsequent phases. This approach is more flexible and allows the developer to renegotiate terms for each phase, potentially achieving better rates as their track record builds. However, it introduces the risk that finance for a later phase may not be available if market conditions change or the developer’s circumstances alter.

In our experience, the optimal approach depends on the size of the development and the developer’s financial position. For schemes of thirty to sixty units divided into two or three phases, a single facility with phased drawdowns is usually the most efficient approach, as it avoids the cost and time of arranging multiple facilities. For larger schemes of sixty or more units over three or more phases, separate facilities are more common, as the extended timeline of four to six years makes it impractical for a single lender to commit at the outset. We work with clients to model both approaches and recommend the structure that delivers the best combination of cost, flexibility, and certainty for their specific project.

Capital recycling is the process of using proceeds from the sale of completed units in one phase to fund the equity or costs of the next phase. This is one of the most powerful financial strategies available to phased developers because it reduces the total equity required over the life of the project. Without capital recycling, a developer building sixty units across three phases might need £2,000,000 of equity for each phase, totalling £6,000,000 over the project. With effective capital recycling, the same developer might need £2,000,000 for Phase 1, £1,000,000 for Phase 2 topped up by profits from Phase 1, and £500,000 for Phase 3 topped up by cumulative profits.

For capital recycling to work, the developer must achieve sales on the completed phase before the next phase begins. This requires careful programming to ensure there is a gap between phases during which sales can be made and funds received. A typical approach is to programme three to six months between completing Phase 1 and starting Phase 2, during which time the developer markets and sells Phase 1 units. The proceeds from these sales, after repaying the Phase 1 development finance facility, become the developer’s equity for Phase 2.

Lenders are generally supportive of capital recycling strategies because they reduce the overall risk profile of the scheme. However, the lender will want to see that the recycling assumptions are realistic. If Phase 1 produces twenty units and the local market typically absorbs three to four units per month, a six-month sales window should yield fifteen to twenty sales, generating sufficient proceeds for the recycling strategy to work. Overly optimistic absorption assumptions will be challenged, and the lender may require the developer to hold additional equity in reserve as a buffer against slower-than-expected sales. We model capital recycling for our clients using detailed cash flow projections that account for realistic sales timelines and transaction costs.

Phased developments often require a separate approach to planning. Some local planning authorities prefer a single outline or full application for the entire site, with reserved matters or phased condition discharge for each phase. Others are willing to accept separate applications for each phase. The planning strategy has implications for the finance structure because lenders require planning certainty for the phase they are funding. If the entire site has outline planning with reserved matters approval for Phase 1, the lender will fund Phase 1 but will not commit to Phases 2 and 3 until those phases have their own reserved matters approval.

Section 106 obligations on phased schemes can be particularly complex. The section 106 agreement may require affordable housing or financial contributions to be delivered across the entire scheme, with specific trigger points tied to each phase. For example, the agreement might require 30% affordable housing to be delivered proportionately across all phases, or it might front-load the affordable housing requirement into Phase 1. The structure of these obligations affects the GDV and profitability of each phase differently, and your development appraisal must model each phase separately with its specific section 106 costs allocated correctly.

Infrastructure costs are another planning consideration that disproportionately affects phased developments. Site-wide infrastructure such as access roads, drainage systems, utilities connections, and public open space is often required to be completed or substantially advanced before any residential units can be occupied. These costs may need to be incurred during Phase 1 but benefit all subsequent phases. Lenders will want to understand how infrastructure costs are allocated across phases and how the upfront expenditure is recouped through later phases. Including a detailed infrastructure phasing plan in your finance application, aligned to your planning conditions, demonstrates a thorough understanding of the delivery challenges and reassures lenders that the project is properly planned.

Phased development inherently reduces risk by limiting the developer’s exposure at any point in time, but it introduces phase-specific risks that need to be managed. The most significant is the risk that market conditions deteriorate between phases. If house prices in your area fall by 10% between Phase 1 and Phase 2, the GDV of Phase 2 is reduced, potentially affecting viability and the terms available from lenders. Mitigation strategies include conservative pricing assumptions in the initial appraisal, maintaining a profit buffer that can absorb market movements, and building flexibility into the design of later phases so the unit mix can be adjusted to reflect market conditions at the time.

Construction cost inflation between phases is another risk. A build programme that spans three years for a three-phase development is exposed to material and labour cost changes that cannot be fully predicted at the outset. Fixed-price contracts for each phase mitigate this risk but are only available once the phase design is finalised and the tender process is complete. For later phases, the developer must rely on cost estimates that may need to be revised upward by the time construction begins. We advise clients to include a cost escalation assumption of 3-5% per annum in their long-term projections for later phases, reflecting the possibility of construction cost inflation.

Finally, there is execution risk. A successful Phase 1 creates momentum and credibility that makes financing Phase 2 easier. A problematic Phase 1, whether due to construction delays, cost overruns, or slow sales, makes everything harder. Lenders for Phase 2 will scrutinise the developer’s performance on Phase 1 and will be reluctant to fund a developer who has demonstrably struggled with the previous phase. For this reason, we always advise first-time phased developers to ensure Phase 1 is the most straightforward and lowest-risk phase of the overall scheme. Use it to build your track record and establish credibility with lenders before tackling more complex or ambitious phases.

Building a strong relationship with your lender during Phase 1 pays dividends for subsequent phases. A lender who has successfully funded Phase 1, seen the project delivered on time and on budget, and received full repayment from sales proceeds is a natural candidate for Phase 2. Repeat lending from the same lender is faster because they already know the developer, the site, and the project, reducing the due diligence burden. Many lenders offer improved terms for repeat business, including lower arrangement fees, faster processing, and potentially higher leverage for subsequent phases based on the proven track record.

However, it is not always optimal to use the same lender for every phase. Market conditions change, new lenders enter the market, and different lenders may be more competitive for different phases depending on their current appetite and lending criteria. We review the lending market for each phase independently, comparing the incumbent lender’s terms with alternatives to ensure the developer always accesses the best available deal. In some cases, using a different lender for a later phase has saved the developer 1-2% on the interest rate, amounting to tens of thousands of pounds in savings on a multi-million-pound facility.

Regardless of whether you use the same lender or different lenders for each phase, maintaining comprehensive records of your project performance is essential. Keep detailed records of actual costs versus budget, programme achieved versus planned, sales prices achieved versus projected, and any issues encountered and how they were resolved. This performance data becomes your evidence base for subsequent finance applications and is the most powerful tool for negotiating better terms. A developer who can demonstrate that they delivered Phase 1 on budget, ahead of schedule, and achieved sales prices 5% above projections will command the best terms available in the market for Phase 2. Contact us through our deal room to discuss finance for your phased development.