The UK holiday and caravan park industry has seen tremendous growth in recent years. With more people opting for ‘staycations’ instead of travelling abroad, demand for caravan holidays in the UK has steadily increased. This presents a lucrative investment opportunity for investors looking to buy or finance a holiday park or caravan site.
What is a DSCR Loan and How Does it Work?
A DSCR loan is a non-recourse loan, meaning the lender will only consider the property’s projected net operating income without looking at your personal income or credit score. The lender calculates the property’s debt service coverage ratio (DSCR) to determine the maximum loan amount.
Here is a simple formula to calculate DSCR:
Net Operating Income / Total Debt Obligations = DSCR
- If a holiday park has a NOI of £250,000
- And total debt obligations of £100,000 annually
- The DSCR would be:
- £250,000 / £100,000 = 2.5
So this property can qualify for a much higher DSCR loan amount because the DSCR is 2.5, meaning there is 2.5x more cash flow than needed to cover the debt obligations.
Lenders usually look for a minimum DSCR of 1.20 or higher. The higher the DSCR, the more the lender will be willing to lend.
Why are DSCR Loans Ideal for Holiday Park Investments?
Holiday parks tend to have high and predictable cash flows.
This makes it easy to calculate the future DSCR. Key revenue drivers like rental income from caravan pitches are stable and recurring. Additional revenue streams from onsite activities also contribute to healthy cash flows.
Flexible repayment structures
DSCR loans allow for flexible interest-only payments instead of rigid amortised payments. This leaves more cash flow available for other operating expenses and upgrades.
No personal guarantees needed
The loan is based purely on the property’s financials. Borrower’s income or credit score is irrelevant. This provides access to financing for a wider pool of investors.
Access to better loan terms
DSCR loans can offer better interest rates and loan-to-value ratios as high as 80%, compared to other financing options.
Loan amount depends on cash flow strength
More cash flow means higher DSCR and larger loan amount. Investors can access higher leverage based on the financial performance of their holiday park.
What Should You Look for in a DSCR Lender?
Choose an established lender with extensive experience in financing UK holiday parks to accurately assess property cash flows.
Look for lenders who offer flexible terms tailored to your investment strategy, not rigid requirements.
Responsiveness and guidance
The lender should provide support and guidance throughout the underwriting and approval process.
Competitive rates and fees
Loan maturity and exit strategy
Consider lenders who allow longer loan terms (e.g. 3-5 years) so your exit horizon aligns with loan maturity.
Certainty of funding
Opt for lenders who underwrite thoroughly and issue conditional loan offers so you have greater funding certainty.
What Types of UK Holiday Parks are Well Suited for DSCR Loans?
DSCR loans work well for financing various types of holiday and caravan parks in the UK:
Established parks with stable occupancy
Look at parks with consistent annual occupancy rates of 50% or higher. This indicates predictable revenue and cash flow.
Newer parks still stabilising
Even newer parks that are still stabilising can benefit from DSCR loans based on projected revenue at stabilised occupancy.
Acquire additional land or existing parks to expand your portfolio using DSCR leverage.
Finance operational improvements and upgrades to boost occupancy and revenue through a DSCR loan.
Sites with planning permission
Unlock financing to develop vacant sites that already have planning approval for holiday use.
Alternative accommodation parks
Parks offering glamping, camping and other alternative accommodation can qualify for DSCR loans.
Coastal, rural and urban locations
Location has minimal impact as long as the financial metrics and DSCR thresholds are met.
Single site or multi-site portfolios
DSCR loans can work for investors financing either individual sites or a portfolio of holiday parks.
What Key Factors Do Lenders Consider for DSCR Loans?
Lenders will assess certain key factors to determine DSCR loan eligibility and terms:
Net Operating Income (NOI)
- A strong focus is placed on current and projected NOI based on revenue minus operating expenses.
- NOI must be high enough relative to debt obligations to achieve the minimum required DSCR.
- Seasonal occupancy percentages are evaluated to estimate recurring revenue.
- Parks with consistent 50%+ annual occupancy rates are preferred.
Revenue Growth Potential
- Analyse historical and future revenue growth to determine cash flow stability.
- Growing revenue boosts NOI and DSCR numbers.
- Realistic operating expenses are deducted to reach accurate NOI projections.
- Cost-efficient parks yield higher NOI and DSCR.
- Lenders may provide up to 80% LTV for parks meeting their DSCR requirements.
- Lower LTVs may be offered for riskier projects with lower DSCRs.
Alternative Sources of Repayment
- External liquidity sources can provide extra assurance of loan repayment ability.
- This can improve loan eligibility if DSCR is borderline.
What Financial Documentation is Needed for DSCR Loans?
Lenders will require various financial statements and documents to perform due diligence and underwrite DSCR loans:
- Last 3 years profit and loss statements – To analyse historical revenues, expenses, occupancy rates and seasonality.
- Current year profit and loss – To assess NOI on a trailing 12-month basis.
- 3-5 year cash flow projections – For underwritten future NOI and DSCR calculations.
- Rent rolls – Support recurring revenue from caravan pitch rents.
- Occupancy reports – Validate current and projected occupancy rates across seasons.
- Site plans – Detail total pitches, rented pitches, and expansion potential.
- Planning permits – Evidence of approved holiday use for vacant sites.
- Loan requests – Desired loan amount, term, use of funds and repayment strategy.
- Proof of property ownership – Title deed, sale contract or lease agreement.
- Asset value report – 3rd party valuation for determining loan-to-value ratio.
How Much Time is Needed to Obtain DSCR Financing?
The entire DSCR loan process can be completed in as little as 30-45 days with an experienced lender. Here are the typical timeframes:
- 5-10 days – Submit application and documents for preliminary review
- 7-10 days – Lender underwriting and initial approval
- 7-10 days – Due diligence such as valuations, site visits etc.
- 5-10 days – Formal loan offer and finalising closing documents
- 2-5 days – Final verification and funding
However, having your financial records organised and working with an efficient lender can help expedite the process further.
Case Study: Financing a Coastal Holiday Park Expansion with a DSCR Loan
Here is a case study showing how a DSCR loan financed the expansion of a thriving coastal holiday park:
- Established 80-pitch coastal park near Cornwall
- Occupancy averaging 75% annually
- Majority revenue from caravan pitch rents
- Additional income from campsite, glamping, shop and cafe
- Looking to add 40 more pitches on adjacent 5-acre land
- Current NOI: £550,000
- Projected NOI after expansion: £850,000
- Total debt obligations: £330,000
- DSCR before expansion: 1.67
- DSCR after expansion: 2.58
£1.5 Million DSCR Loan Obtained
- Funded 100% of land purchase and development costs
- Provided 80% LTV at competitive interest rate
- Loan maturity matched projected stabilisation
- NOI and DSCR supported debt service after stabilisation
- Expansion increased occupancy to 85%
This case study demonstrates how the park’s strong cash flows and improved DSCR after expansion allowed them to qualify for a sizable DSCR loan to fund growth.
Wrap Up: Take Advantage of DSCR Financing for UK Holiday Parks
For investors and entrepreneurs looking to capitalise on the thriving UK holiday park industry, DSCR loans present an optimal financing solution. Park owners can access flexible, asset-based funding that matches their investment horizon and cash flow profile.
With in-depth due diligence and conservative underwriting, established lenders offer DSCR loans up to 80% LTV for both stabilised and value-add holiday parks across the UK. Strong demand, recurring revenues, and increasing staycations provide a robust platform for cash flow generation.
By utilising DSCR leverage, investors can scale up existing portfolios, acquire new parks, or develop expansion projects to meet rising consumer demand for UK holidays. With the right financing strategy in place, the possibilities for growth are only limited by supply constraints for attractive holiday parks and sites.