Industrial and logistics development finance

How does a lender appraise an industrial development?

A development lender underwrites the project before the borrower. The starting point is the total cost build-up: the site at its purchase price or current value, the construction contract, professional fees, statutory costs, finance costs and a contingency, usually 5 to 10 percent of the build cost, that the lender insists on whether the developer wants it or not. The contract itself is scrutinised, because a fixed-price design and build contract with an experienced contractor reads very differently from a developer self-managing trades, and the lender will diligence the contractor's accounts, current workload and track record as carefully as the borrower's. Planning must be in place, with conditions that can actually be discharged on the programme assumed in the appraisal, and the consented use class needs to match the occupier market the appraisal relies on: B2 general industrial, B8 storage and distribution, or E(g)(iii) light industrial each pull a different pool of tenants and buyers.

Against that cost sits the gross development value, the combined value of the finished units, and the evidence behind it. For an industrial scheme the lender wants to see comparable lettings and sales in the catchment: what similar units achieve per sq ft, how quickly they let, and who the occupiers are. Eaves height, yard depth, loading access and power supply all feed the value, because a unit a tradesman or light manufacturer can actually use is worth more than a shed that merely encloses space, and a three-phase supply or a generous secure yard can be the difference between a unit that lets in weeks and one that sits. The appraisal also needs to survive sensitivity testing: build cost up 10 percent, values down 10 percent, the programme three months longer. We build the appraisal the way credit committees read it, with the sensitivities run and the evidence appended, so the questions are answered before they are asked.

How much can you borrow against cost and GDV?

Development facilities on industrial schemes typically run from around 500,000 pounds to 50 million pounds and beyond. The advance is set by two ceilings tested together. Loan to cost, the facility as a share of the total project cost, typically reaches 65 to 75 percent, with the developer funding the balance in equity, usually front-loaded into the site purchase so the lender funds the build. Loan to gross development value typically caps out at around 60 to 65 percent, protecting the lender's exit if values soften before completion. Whichever ceiling bites first sets the loan. In practice the facility splits into a land advance drawn on day one and a build tranche drawn monthly against the monitoring surveyor's certificates, so interest accrues only on what the scheme has actually spent.

Pricing reflects the risk of part-built property. Rates start from around 8 percent on senior development debt and move with leverage, scheme scale and the developer's track record, with arrangement fees typically 1 to 2 percent and sometimes an exit fee on the larger facilities. Because the interest rolls up, the real question is not the headline rate but the total finance cost across the programme, which is why an 18 month scheme appraised honestly at 22 months should be financed for 24. We model the facility against a realistic programme, not an optimistic one, so the funding does not expire before the scheme does.

Do you need pre-lets, or will lenders fund speculative schemes?

Lenders fund both, but they price and size them differently. A pre-let to a trade counter brand or a logistics operator, or a pre-sale to an owner-occupier, converts projected income into contracted income, and that de-risking flows straight through the appraisal: higher leverage, keener pricing and a wider choice of lenders. A pre-let big-box warehouse can also unlock forward funding, where an investor commits to buy the completed asset and effectively funds the build. Small-unit schemes have a structural advantage of their own, because individual units can be pre-sold to local SME owner-occupiers off plan, and even two or three exchanged contracts on a ten-unit terrace materially change how credit reads the whole scheme. Owner-occupier demand also behaves differently from investor demand: a joinery or vehicle repair business buying its own premises is purchasing security of tenure, not chasing a yield, which makes those sales more resilient when the investment market cools.

Speculative development, building without committed occupiers, is financeable where the demand evidence does the work a pre-let would have done. That means a tight supply story in the catchment, letting agents' evidence of named requirements, and unit sizes pitched at the depth of the local occupier market. A terrace of 2,500 sq ft units can draw on dozens of potential occupiers in most towns; a single large logistics box relies on a thinner pool of national operators, so credit committees read the two very differently and price the difference. Big-box take-up of 25.6 million sq ft in 2025, up 22 percent on the year (CBRE), gives lenders confidence in well-located logistics schemes, but they will typically hold leverage a little lower on fully speculative development and want a developer who has let or sold similar space before. We present the demand case with the evidence attached, because an asserted rental value persuades nobody.

What about refurbishing or extending existing units?

Refurbishment finance funds works to existing industrial property: recladding and reroofing, new loading doors, upgraded power, mezzanine floors, splitting a larger unit into several smaller ones, or extending into spare yard. Lenders distinguish light refurbishment, broadly cosmetic and services work, from heavy refurbishment involving structural alteration, and price accordingly. The facility is usually structured as a bridging-style loan with a works element, sized against the current value plus the funded cost of the works, and repaid by refinance onto a term loan or by sale once the improved units are let. Where the works create genuine value, subdividing a 12,000 sq ft unit into four smaller ones is the classic example, the uplift between the day-one value and the end value often funds a large share of the project itself.

The case for these projects is often regulatory as much as commercial. Under MEES, a commercial unit with an EPC rating below E cannot lawfully be let, and the direction of travel on energy standards means many older industrial units need investment simply to stay lettable. The same works typically lift the achievable rent, because refurbished space with decent power, LED lighting, insulated cladding and a compliant EPC lets faster and to better covenants, and an improving EPC also widens the field of term lenders willing to refinance the finished unit. We arrange funding for estate owners working through a rolling refurbishment programme as well as for single-unit projects, and we match the facility term to the realistic works and letting period.

How is the development exit repaid?

Every development facility is underwritten back from its exit, and industrial schemes have three. The first is sale: small units sold individually to owner-occupiers, often the fastest exit on a well-pitched scheme because SME buyers purchase for their own use rather than on yield. The second is an investment sale, disposing of the completed and let scheme, or a pre-let distribution warehouse, to an investor in one line, where the value rests on the rents achieved, the covenants signed and the WAULT created, and a forward funding deal can fix that exit before a brick is laid. The third is refinance: letting the units, then moving onto a term investment loan sized on the new rental income and repaying the development debt while keeping the asset. Many schemes blend all three, selling a few units to owner-occupiers to pay the facility down, letting the rest, and refinancing the retained income.

The exit shapes the structure from day one. A developer intending to hold needs the end loan to work, so we test the projected net rent against term-debt interest cover requirements before the first drawdown, not after practical completion, and we sanity-check the assumed investment yield against real transactions rather than hope. A developer intending to sell unit by unit needs partial release provisions, so each sale repays an agreed slice of the facility and the security over sold units is released cleanly. Where letting runs slower than planned, a development exit loan can bridge the gap at a lower rate while the tenancy schedule fills. We arrange that too, and it is far cheaper arranged early than negotiated in a hurry.