Five Key Strategies for Overcoming Financing Hurdles
As Australia’s property market takes tentative steps towards recovery, investors and developers are beginning to look for new finance opportunities. With more lenient lending practices in place and the cash rate reaching a historic low, many developers are primed to get the ball rolling on new projects.
DFP has first-hand experiencing in working with property developers and partners to deliver strategic financial advice.
Here are five key strategies for overcoming financing hurdles and how you can put your best foot forward when looking for finance.
Hold sufficient equity to meet obligations beyond the costs of the project
Obtaining the necessary finance for your next project relies on many variables that you have to be prepared for before seeking out a loan. Potential borrowers should always work to minimise their financial risk, particularly at the tail end of a difficult lending period in the Australian market. Many of these variables are in your control and can be managed with some research and investigation into what your project requires.
One of these variables is holding sufficient equity, not only to ensure your suitability for a loan but also to guarantee that you can and will meet obligations that go beyond the initial costs of your project. A development loan is typically structured so that the lender provides up to 70-80 per cent of the final cost of the project, rather than its end value.
As a developer, you – or your equity partners – will be responsible for contributing some funding towards the development, depending on its size and scale.
Most lenders like to see that a potential borrower will have positive equity – in the form of property or cash – before they can finance a project. A common problem that developers face is lenders denying them finance on the basis of insufficient income, lack of equity, or both.
This income and equity will often need to cover obligations, such as marketing and pre-sales, that go beyond a project’s initial costs.
DFP offer preferential equity/mezzanine finance, which is a hybrid of debt and equity that is subordinated to any senior leader. The most sustainable use of mezzanine finance is to settle the land, finalise design and approvals, fund sales and marketing costs to achieve pre-sales. This happens once projects have de-risked with DA and pre-sales achieved.
Don’t build in saturated markets
Successful property developers must create a product that people want to buy. Creating this product requires research, and learning as much as possible about your target market and the type of property that is most desirable for the area.
A lender is far less likely to finance a project that already has an overwhelming presence in the market. Even at the moment, despite a boost in market optimism, lending remains in contraction and building conditions are subdued.
For example, Brisbane’s apartment market has recently seen record levels of new apartment completions in the inner-city area, which have tipped the market into oversupply. Over the 2017-18 period, 52 projects were abandoned or deferred. Due to these numbers, vacancy rates in Brisbane’s inner-city apartment market have increased substantially.
A successful lender will be aware of these trends and less likely to approve a project if the market is showing signs of oversupply or saturation. Your research should make you aware of where your project is needed and its most suitable target market.
Look for growth corridors and infrastructure roll outs
Economic corridors are designed to stimulate development within a geographical area through infrastructure and planning. Planned growth corridors typically incorporate high level integrated land use and transport plans that create a strategy for the development of a city or urban area.
Growth corridors signal the expansion of Australia’s key areas through housing, jobs, transport and town centres. Property developers should stay on top of emerging growth corridors to take advantage of these new development opportunities.
For example, Melbourne is one of Australia’s fastest growing cities and already has several large-scale plans in place to support its expansion over the next 30 to 40 years. Plans from the Victorian Planning Authority focus on four metropolitan growth corridors that include major infrastructure roll outs. These plans identify residential area and recreation precincts, as well as the creation of brand-new metropolitan corridors.
A property developer who has up-to-date knowledge of these plans and which areas will receive infrastructure roll outs are well placed to make an informed decision about their project, which is more viable for a lender to finance.
Have a USP for the product
Having a unique selling point or proposition (USP) is not a new concept but still one that remains vital for how easily property developers can obtain finance. The internet and social media have transformed the way that people interact with property and how they make purchasing decisions. Many customers have become somewhat immune to traditional marketing methods and depend on their own research into a project.
For property developers, this revolution means that a unique selling point must be well-defined and delivered to your target market with pinpoint accuracy. With information at their fingertips, buyers are more informed about the area they are looking to buy and the history of a particular property.
Creating a product without a USP means that it could blend into the market and get lost among similar ideas. Lenders will look for a product’s USP when assessing whether to finance a project as extra insurance that the project will achieve the success laid out in its initial pitch.
Use proven professionals in the delivery
Choosing the right finance partner is a careful science that relies on your compatibility and collective strengths and weaknesses. The best candidate should be a specialist advisor with a demonstrable track record of working with projects that are similar to yours.
To ensure that your project is approved without delay, keep in mind that most Australian lenders – both traditional and non-traditional – only offer the base financial component to a development. A full-service finance group can make a positive impact on the overall project through contributing their advice and skills towards every stage of development.
By using proven professionals in the delivery of project finance, you can utilise a complete strategy that mitigates risk and optimises returns.
Development Finance Partners are challenging the traditional finance sector by providing more personalised services and support that goes beyond initial financing.
Contact us to discuss a finance partnership for your project.
For expert advice:
Level 3, 31 Alfred St
Sydney NSW 2000
P / 02 8916 6246
Level 30/35 Collins Street,
Melbourne VIC 3000
P/ 03 8692 0082
Level 18, 175 Eagle Street
Brisbane QLD 4001
P / 07 3041 4136
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