If you’re a property developer, or you’re considering getting into property development, it’s likely that you’ll need to access some funding to make your project viable. However, it can be difficult to understand what types of finance are available and the types of projects that you can use the funding for. So we thought we’d take a bit more of an in-depth look at how to finance property development including what property development lending options are available and what the key considerations are when deciding which route is best for you.
What is property development finance?
Property development finance, also known as property development lending, is a form of financing specifically designed to support real estate developers in acquiring, developing and constructing properties. This type of lending is crucial for property developers who often require substantial capital to cover land acquisition, construction costs, permits, and other expenses associated with property development projects.
Depending on the type and scale of your project, you can apply for residential, commercial or specialised property development loans.
What Can A Property Development Loan Be Used To Fund?
Lenders can finance the acquisition of land and various construction and building costs. As highlighted above, projects can generally be split into 3 main types:
Residential projects This includes single dwellings, land subdivisions, unit & townhouse complexes; generally up to four units on a title
Commercial projects This includes industrial, retail & office developments
Specialised assets Some examples of this include pubs, clubs, service stations, medical & childcare centres.
If you are looking for a home construction loan this is treated slightly differently.
Key Considerations For Property Developers When Seeking Funding
If you’re looking to secure funding to purchase a block of land for example, there are a number of things that you will need to consider when applying for an ‘acquisition loan’.
Regardless of the lender, it will pay to be well-prepared to ensure the process runs as smoothly as possible. Among the questions lenders may have include:
What is the vision for the land? Are you a residential property developer or is the vision to create industrial warehouses,or maybe even a bowling alley or a childcare centre?
Is the land currently zoned for the vision, or will that be a possible hurdle?
Where is the land? Proximity to existing developments, towns or cities, urban centres and business districts may make the project easier to sell to customers. At the same time, regional or rural land is more niche and might require more perceived risk.
Will the proposed product sell? Projects need to be designed and marketed with a product with a high chance of success in sales.
What segment of the property cycle is the market in; is now a good time to prepare for the next 'wave' of demand in the market?
How To Finance Property Development In Australia
In Australia, there are essentially two types of property development loans: traditional bank loans and private lender finance.
1. Traditional Bank Loans:
A bank's willingness to finance a property development project will be influenced by:
the risk of investing money in the developer. Do they have a clean credit history; if not, how likely are they to repay the loan?
the project's risk level and evaluating the above factors to determine the development's viability. Banks may also have unique internal criteria to measure a project.
They will also consider the amount of capital a developer has to bring to the table compared to the loan's value. Banks often use a loan-to-value ratio or LVR to describe this balance. The LVR represents the percentage of the value of an asset that has been borrowed. Generally speaking an LVR lower than 65% is considered a relatively low-risk loan.
The banks may also have additional requirements including a certain amount of product pre-sales, a required projected profit margin, or a certain percentage of the project's gross-realised value (GRV). The GRV describes the completed project's value compared to the loan's value. Other factors may be access to emergency funds or caveats to the loan that govern to what the funds may be applied.
Benefits of bank finance: Traditional bank loans are widely available and can offer competitive interest rates. They may be suitable for established developers with a strong credit history and a proven track record.
Considerations: Banks typically have stringent lending criteria and may require a substantial deposit or collateral.
2. Private Lenders:
Non-bank or private lenders are an alternative to property development loans from big banks. These lenders can be people or organisations willing to invest in development plans. They will assess many of the same factors but tend to be less conservative in evaluating a project, specifically regarding things like LVRs. Some private lenders are more comfortable loaning higher percentages of the project's value and may even be willing to do so without any pre-sales of the product.
Pursuing the private lending route can unlock finance faster due to less red tape and prerequisites to meet. Interest rates vary between banks and private lenders, and finance experts can help developers acquire the best possible arrangement.
Benefits on non-bank finance: Non-bank lenders or private lenders may provide more flexible lending options. They often have quicker approval processes and may be open to financing projects that banks deem higher risk.
Considerations: Interest rates may be higher compared to traditional banks, and loan terms might be shorter.
Other Property Development Lending Options
While there are several other types of property development funding options available, these are less commonly used and come with their own set of risks and benefits. These include:
Mezzanine Financing:
Mezzanine financing is a hybrid form of debt and equity financing.
Benefits of Mezzanine Finance: It can bridge the gap between the developer's equity and the senior debt provided by traditional lenders. Mezzanine lenders typically take a share of the project's equity, offering flexibility in repayment terms.
Considerations: Mezzanine financing is generally more expensive due to higher interest rates or a share of profits, and it involves a higher level of risk.
Joint Ventures
Joint ventures involve partnering with another entity, often an investor, to share the risks and rewards of a development project.
Benefits of Joint Venture Financing: This can provide additional capital and expertise.
Considerations: Developers will need to share the profits and decision-making authority with their JV partner.
Private Equity or Equity Partnerships
Private equity firms or equity partnerships can provide substantial funding in exchange for an ownership stake in the development project.
Benefits of Equity Partnerships: This can be a source of significant capital.
Considerations: Developers may relinquish a significant portion of their project's ownership and profits.
The choice of property development finance will depend on various factors, including the scale of the project, the developer's experience, risk tolerance, and the specific requirements of the development. Developers should carefully assess their financial needs and seek professional advice to select the most suitable funding option for their project. It's essential to understand the terms, costs, and risks associated with each financing method before proceeding.
Experienced developers know that time is of the essence; the faster a build can begin and finish, the quicker sales can happen in residential and commercial environments. A finance expert will help identify the lending route that will help developers make rapid progress.
Consulting CJG Finance for your property development project gives you access to their experience, connections and processes. Obtaining a loan for your project can be a lot more straightforward with the help of a professional to guide you.
If you're considering your options for a development project, talk to our property development loans expert, Colin Green. To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au
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