Development Finance and Profit Margins: What Return Do Lenders Expect

Profit margin is not just a measure of your return as a developer; it is the primary risk buffer that protects your lender in the event that the project does not perform as expected. When a development lender assesses your scheme, they want to see enough margin between total costs and expected revenue to absorb cost overruns, sales delays, or a softening market. If your projected profit is too thin, the lender has limited protection against loss, and they will either decline the application or reduce their leverage to create a larger buffer.

In the UK development finance market, the minimum acceptable profit margin for most senior lenders is 20% of Gross Development Value for residential schemes. On a project with a GDV of £5 million, that means the lender wants to see at least £1 million of profit after all costs, including land, construction, professional fees, finance costs, sales costs, and contingency. Some lenders express this as a 25% profit on total cost rather than 20% on GDV, which produces a similar threshold. Below this level, the lender considers the margin of safety insufficient to warrant their risk exposure.

We have arranged development facilities for hundreds of UK projects and can confirm that the 20% on GDV threshold is consistently applied across the market. However, there are nuances. Pre-sold schemes, where units are sold off-plan before construction begins, may be approved with margins as low as 15% on GDV because the sales risk has been substantially eliminated. Conversely, speculative commercial developments or schemes in weaker markets may need to demonstrate margins of 25% or more to satisfy lender appetite. Understanding your lender's specific margin requirements before you finalise your appraisal saves time and prevents wasted application fees.

Lenders do not simply accept the profit margin shown in your development appraisal at face value. They conduct their own independent assessment using the figures you provide, adjusted for their own assumptions where they differ from yours. The lender's credit committee will typically apply more conservative assumptions to your GDV (using the lower end of comparable sales evidence) and more cautious build cost estimates (often adding to your contingency) to stress-test whether adequate margin survives under pessimistic conditions.

The calculation itself is straightforward: profit margin on GDV equals (GDV minus total development costs) divided by GDV, expressed as a percentage. Total development costs include land purchase price (including Stamp Duty Land Tax), all construction costs, professional fees (architect, structural engineer, planning consultant), finance costs (interest, arrangement fees, valuation, legal), sales costs (estate agent fees at 1-1.5% plus marketing), and contingency (typically 5-10% of build costs). On a scheme with a GDV of £3 million and total costs of £2.4 million, the profit is £600,000, giving a margin of 20% on GDV.

Where developers often stumble is in underestimating finance costs within their appraisal. If you have not yet obtained a term sheet, you may estimate interest at 7% when the actual rate turns out to be 9%, or forget to include the mezzanine interest if you later need additional leverage. A £2 million facility at 9% with rolled-up interest over 18 months costs approximately £270,000 in interest alone, before fees. If your appraisal only budgeted £180,000 for finance costs based on a lower rate estimate, your actual margin is 3% lower than projected. We always recommend using realistic, slightly conservative finance cost assumptions when preparing your initial appraisal. You can refine these once you have firm term sheets.

Different types of development carry different margin expectations, and understanding these thresholds helps you assess which projects are viable before investing significant time and money in feasibility studies. Standard residential development for sale is the baseline, with a minimum of 20% on GDV expected by most lenders. This applies to new-build houses and apartments in established residential locations with good comparable evidence.

Residential conversion and refurbishment projects, where an existing building is converted into flats or upgraded to modern standards, are typically approved with slightly lower margins of 17-20% on GDV. The rationale is that the risk profile is somewhat lower than ground-up construction. The building already exists, foundations are in place, and the scope of works, while still significant, does not carry the same level of uncertainty as a new build. Refurbishment finance lenders understand this dynamic and adjust their criteria accordingly.

Student accommodation, build-to-rent, and commercial developments each have their own margin expectations. Student accommodation schemes are often assessed on yield rather than outright profit margin, with a target net initial yield of 5-7% on completed value. Build-to-rent schemes may accept lower development margins of 12-15% on GDV because the exit is a refinance onto a long-term investment loan rather than individual unit sales, which removes sales risk and cost. Commercial developments are assessed on a case-by-case basis, but margins of 20-25% on GDV are typical for speculative schemes without pre-lets. For more on how build-to-rent structures work, see our guide on build-to-rent development finance.

We always advise developers to understand the margin threshold for their specific project type before submitting a funding application. Presenting a scheme with a 16% margin to a lender who requires 20% wastes time for both parties. If your margin is below threshold, the more productive conversation is about how to improve it, whether through value engineering the build costs, enhancing the GDV through better specification, or restructuring the capital stack to reduce finance costs.

There is a direct and often misunderstood relationship between profit margin and the leverage a lender will offer. Higher margins enable higher leverage because the lender's risk buffer is larger. Conversely, tight margins force lenders to reduce their exposure, requiring you to contribute more equity. Understanding this relationship allows you to optimise your capital stack by making informed decisions about site acquisition pricing, build specification, and sales strategy.

Consider two schemes, both with a GDV of £4 million. Scheme A has total costs of £3 million (25% margin on GDV). Scheme B has total costs of £3.4 million (15% margin on GDV). A lender offering 65% LTGDV will provide £2.6 million to both schemes. But Scheme A's developer needs to find £400,000 of equity (£3 million minus £2.6 million), while Scheme B's developer needs £800,000 (£3.4 million minus £2.6 million). The lower margin in Scheme B has doubled the equity requirement despite the same GDV.

More importantly, lenders may further constrain leverage on lower-margin schemes. A lender comfortable with 65% LTGDV on a 25% margin scheme might cap leverage at 55% LTGDV on a 15% margin scheme, increasing the equity gap even further. We have seen cases where improving a scheme's margin by just 2-3% through build cost optimisation unlocked an additional 5% of LTGDV from the lender, freeing up £150,000 to £200,000 of equity that the developer could redeploy elsewhere. This is why we encourage developers to treat margin improvement not just as a profit exercise but as a leverage and capital efficiency strategy. Submit your appraisal through our deal room and we will model how margin adjustments could improve your overall funding terms.

The most effective way to protect your profit margin is to control your acquisition cost. Land is typically the single largest cost in any development, and overpaying for a site compresses your margin more than any other variable. We advise developers to work backwards from GDV: determine a realistic sales value for the completed units, deduct all development costs including a target profit margin, and the residual figure is the maximum you should pay for the land. This residual land value approach ensures that your margin is built into the deal from day one, rather than being squeezed by an emotional purchasing decision.

Build cost management is the second lever. Obtaining at least two competitive tenders from reputable contractors and negotiating a fixed-price or guaranteed-maximum-price contract transfers cost overrun risk from you to the contractor. In our experience, the difference between the lowest and highest tender on the same specification can be 15-20%, which on a £1.5 million build cost represents £225,000 to £300,000 of margin protection. Value engineering, where the architect and contractor collaborate to reduce costs without compromising saleability, is another powerful tool that can add 2-5% to your margin.

Finally, consider how your sales strategy impacts margin. Selling individual units through a local estate agent is the standard approach but carries marketing costs of 1-1.5% of GDV plus potentially lengthy sales periods. A bulk sale to a housing association at a small discount (typically 10-15% below open market value) eliminates sales risk and cost, often resulting in a comparable net margin despite the lower headline revenue. We have arranged deals where a developer's margin actually improved by accepting a housing association bulk purchase because the savings in marketing costs, sales fees, and extended finance charges more than offset the price discount.

In a rising cost environment, many developers find that their margins are being squeezed by increasing build costs, higher finance rates, and uncertain sales values. When your projected margin falls below the lender's minimum threshold, you have several options before abandoning the project entirely.

The first option is to renegotiate the land price. If you have exchanged contracts subject to planning, you may be able to renegotiate the purchase price in light of changed market conditions. If you already own the site, this option is not available, but you can seek to reduce other costs. The second option is to revise your planning application to increase density or change the unit mix. Adding one additional unit to a scheme can improve GDV by £250,000 to £400,000 without proportionally increasing build costs, which can transform a marginal scheme into a viable one.

The third option is to restructure your capital stack to reduce finance costs. Moving from a layered senior-plus-mezzanine structure to a stretched senior facility can save £30,000 to £80,000 in combined interest and fees. Alternatively, bringing in an equity partner who provides cash at a lower blended cost than mezzanine debt can preserve more of your margin. The fourth option, which we recommend as a last resort, is to hold the site and wait for market conditions to improve. While this carries holding costs, in a rising market the GDV uplift over 6 to 12 months may restore your margin to viable levels.

Whatever approach you take, the key is to make these decisions based on rigorous financial modelling rather than optimistic assumptions. We have seen too many developers proceed with sub-threshold margins hoping that sales values will be higher than projected, only to find themselves in difficulty when the market delivers exactly what the evidence suggested. Our advisory team can help you stress-test your appraisal and identify the most practical route to a viable margin. For a broader look at how to calculate your scheme's value, see our guide on how to calculate GDV.