Population growth and constrained housing supply have increased pressure on Australia's housing market. Developers must still manage rising land values, construction-cost uncertainty, sales-price risk and stricter lender assessment. A workable property development finance strategy therefore needs to be considered alongside feasibility—not after the project design is fixed.
The Five Key Factors Banks Consider in Development Deals
- Sales Price Valuation : An assessment of the potential sales price of the developed property.
- Construction Costs Confirmed by a Quantity Surveyor : A precise estimation of construction expenses.
- Return on Total Development Costs : Targeted at approximately 18% to 20%.
- Loan to Value Ratio (LVR) : Loans not exceeding 75% of the total development costs or 65% of the net realization value.
- Pre-sales Volume : Adequate to cover the repayment of all debts.
Current Challenges for Developers
- The uncertainty around construction costs has made developers hesitant to sign pre-sale contracts.
- Builders are wary of entering fixed-price contracts due to the unpredictability of transaction costs.
Alternative Financing Strategies
Where a project does not meet bank requirements, developers may examine non-bank, mezzanine or private lending. These alternatives can offer flexibility but generally carry higher costs and require a clear exit strategy:
- Non-Bank Loans : These offer developers the flexibility to adjust sales prices upon project completion or in response to recent market changes. Though this option offers greater flexibility, it typically comes with higher interest rates and additional financing costs.
- Mezzanine Financing : Provides an additional source of capital, bridging the gap between traditional senior debt and the developer's equity. Positioned between senior debt and equity, mezzanine loans are considered higher risk, thus attracting higher interest rates. Despite the higher costs, mezzanine financing delivers the essential funding for development projects, especially when budget overruns occur or additional funds are needed to ensure timely completion. This financing option offers developers greater financial flexibility, enabling them to manage the uncertainties of construction costs and project delays. However, leveraging mezzanine financing requires developers to have substantial industry experience and accurate market insights to ensure project success.
Non-bank and mezzanine finance may provide another funding pathway, but only after the additional cost, security, drawdown and exit risks have been tested. Developers can ask Smart Mortgage to compare project funding options before committing. Finance approval and project returns are not guaranteed.