How much are developers over stretching themselves?

Developers tempted to finance a property project entirely with debt are taking serious risks and leaving themselves little room for error, warns broker Saam Lowni (pictured), who describes it as ‘the perils of 100% debt’.

They need to be cautious with highly leveraged deals, urges Lowni, who is founder and managing director of Merryoaks Finance, a brokerage that finds property finance solutions for investors and developers.

Lowni’s warning comes as new research indicates that property developers in the UK are showing renewed confidence in the residential property market. More than half - 61% - of surveyed developers anticipate a better market in 2025, with nearly one in five (18%) expecting notable improvement, according to the findings from specialist bank, Shawbrook. Furthermore, 28% of over 550 UK-based property developers questioned, attribute the government’s housing delivery ambitions as a primary reason for increased confidence; 28% pointed to proposed changes in planning regulations which could unlock further development opportunities, and 26% said national housebuilding targets had boosted their expectations around land and property availability.

Read more: Brokers respond to Bank of England's economy warning

How useful is debt in property development?

In a challenging economy, it stands to reason that developers might consider taking greater risks,  but Lowni suggests they need to guard against over confidence. “Debt is a powerful tool, but only when used wisely,” he said. “It can boost your returns significantly or wipe you out completely. It’s tempting for developers to finance their entire capital stack with debt instead of offering equity in exchange for funding - after all, why give away 50% of your profit or 20%-plus in returns when you can borrow the full amount and give away a fraction? The answer is simple - building your capital stack with pure debt carries serious risks.” 

He continued: “When debt makes up 100% of the funding, there’s little or no room for error. Everything must go perfectly. From low build costs to strong sales, and ideally a rising market. But what happens when costs creep up or sales slow down? Margins shrink, profits turn to losses, and developers find themselves in trouble. At that point, the choices aren’t pretty.”

Developers face injecting more cash, raising more debt, rushing a sale, or even facing insolvency, Lowni warns – and, worse still, they risk putting themselves into a fraud situation. “This can create a cycle of over-leveraged projects, mounting liabilities, and, in extreme cases and more common than most care to admit, an unintentional Ponzi-like scenario where new debt is used to cover old losses,” he said.

Lowni knows his stuff. He cut his teeth in the property market as a young man, growing a portfolio with his parents in North East London, and some of those properties have gone up five or six times in value. With the global financial crisis of 2008, demand for rental property increased, rents escalated and Lowni was able to clear his property loans. He took some time out abroad, including five years in Hong Kong. When the market bounced back he returned to the UK, refinanced his portfolio and bought up more properties which would yield high incomes. In 2021, his brokerage Merryoaks Finance, was established to support SME property investors and developers. It was built off the back of his own experience of investing, and as such he understands the risks involved, particularly around 100% finance. Last year, his two-man business did just shy of £40m in terms of loan sizes. “Developers should be cautious with high-leverage deals and stay attuned to market conditions,” he said. “If you must go the 100% debt route - after all, we are all adults - just ensure you’re fully aware of the risks.”

Lowni sounds a note of caution too for those who might be investing their capital into a development project. “Investors, always review the balance sheet of those you are investing in,” he said. “Scrutinise assets and liabilities, and don’t dismiss the benefits of taking an equity stake for better long-term returns. A well-structured deal today can prevent major headaches down the line.”