Cheap Money Isn’t Easy Money When It Comes To Development Funding
The current economic climate has had a profound effect on the property development sector, particularly on the way projects are financed.
While interest rates are low, lenders are few and far between
Interest rates are currently at a record low and are expected to remain low over the coming years as a result of the COVID-19 pandemic. This seems, at first glance, like a golden opportunity for developers to secure financing from either a bank. According to PRD Nationwide chief economist Diaswati Mardiasmo, “Investors who are ready and able to purchase will be able to use record low interest rates to secure lower repayments for a fixed period, which could translate to more sales.”
While these circumstances may seem ideal, there are many unseen factors that developers must consider to avoid a financing pitfall during this unstable time. It is now more important than ever for developers to seek the help of experts who can guide them towards a transparent and mutually beneficial financing solution.
Why the rate that’s advertised is unlikely to be the rate you can get
The Reserve Bank’s Financial Stability Review report explored the risks facing lenders moving forward in uncertain times.
“For developers with projects still under construction but with currently unsold properties, it could be difficult to finalise sales at a profitable price. Developers will then be left holding inventory – and debt – on their balance sheets with little or no revenue. This is a key risk for lenders.”
It is no surprise, then, that banks have dramatically changed their criteria for lending, adding clauses to ensure they are protected.
This means the interest rate that you, as the developer, end up with is not likely to be as low as it initially appears.
To minimise the risk of committing to unprofitable projects, banks are now asking for much stricter information on serviceability. They have also become far more selective with the projects they approve, lending only to extremely low-risk clients.
Private funding is increasingly the option
Private lenders, on the other hand, may be less selective with the projects they approve, instead opting to charge high rates and asking for significant security. Non-bank lenders such as Pepper Money, Latitude, and Bluestone, are three of the many that have made drastic changes to their credit risk appetites. These changes manifest as “restrictions on loan applications from borrowers highly impacted by the economic fallout from the coronavirus.”
Non-bank lenders have higher fees and charges than banks, but not to dissimilar to interest rate pricing 6 years ago; however, in the current climate, many developers are turning to non-bank lenders for their financing.
In times like these, when small oversights can have monumental repercussions, it is critical that you work with an expert who understands the movements of the market and can keep up with its rapidly changing conditions.
How a private development funding expert can help you get the best outcome
A good private development funding advisor has a deep understanding of the market on any given day and can guide you with:
Who is in the market to fund your type of project
An experienced advisor understands the different tiers that financiers fall under and can advise you on which of them have the capacity and mandate to finance projects throughout this time, thus increasing their market share.
How the funding criteria is changing on a daily basis
Your finance partner should be constantly updating their capital partners database, taking note of their changing criteria as the recession progresses. Through constant research and communication they should be able to maintain a birds-eye view of the opportunities and pitfalls facing developers today.
Now more than ever you need to be working with someone with significant capital contacts who has unique insight into their capabilities. If you are looking to finance a new development, you need experts on your team who can pair you with the right capital partner for your individual circumstances.
Could your next project benefit from some expert development finance? Get in touch.
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