Presales affecting property developers and how you can overcome the pre-sale hurdle.
As we continue to move into the downward part of the credit, property and economic cycles the wider Property Development industry is feeling the pressure.
It’s impossible to ignore that our clients are experiencing this pressure as result of the following:
- Slowing presales and On Completion sales rates
- Falling demand for sites is forcing Valuers to retreat and price downside risk
- Increased sales incentives
- Increased cost of presales commissions
- Increased marketing and advertising costs
- Previous sales channels are drying up as:
- Banks are heavily restricting sales to non-resident purchasers with respect to their qualifying presales policies.
- Chinese based purchasers are finding it increasingly difficult to get money out of China due to the Chinese Governments increasing efforts to stop the Yuan leaving the Chinese mainland.
- Relatively thin local markets are drying up due to the high volumes of supply entering the market only made worse by the amount of competing developments.
- Decreased liquidity as Banks reduce gearing from 80% of TDC to 75% and 70%
- Increased presales hurdles are now routinely being demanded by the Banks. qualifying sales hurdles are now at 100% debt cover up from 80% or less.
- Increased holding costs resulting from delays created by an inability to bring a project to market.
- Projects having to be mothballed
- Increasing construction costs due to the over abundance of stock currently being constructed at the height of the construction cycle.
- Difficultly settling existing presales due to valuation write downs and the purchasers inability to obtain finance.
A combination of the above factors is making it increasing difficult for the Banks customers to do business with them.
Overall, banks are offering cheaper fees, and interest rates are lower, but there are other options out there that allow developers with good-quality projects to get their projects moving without onerous pre-sale conditions.
An advantage of using non-bank lenders is the comparative flexibility of finance approval, particularly regarding how banks qualify the developer’s serviceability. Often, the banks’ stringent vetting processes can dramatically limit the developer’s assessed borrowing capacity.
Sometimes paying a little bit of extra interest will reap rewards in the long run, particularly by expediting each project, thereby compressing the whole pipeline of the projects, without having to jump through bank hurdles.
In addition, onerous pre-sale conditions that banks may demand can actually have an adverse effect on bottom-line profitability. Developers may have to drop prices and pay higher commission to agents in order to meet banks demands.
A typical scenario for medium-size development in the current market with bank funding:
- 24 x $500k units,
- land being purchased with equity,
- banks offering a 6.5 per cent interest rate would typically demand pre-sales for 50 per cent of units, pre-sales discounted at 5 per cent and commissions at 6 per cent
- The outcome was a development margin of 15.9 per cent with a development profit of $1.44 million.
A typical scenario for medium-size development with non-bank bankding:
- 24 x $500k units
- Land being purchased with equity
- Higher interest rate of 10 per cent, but without having to discount pre-sales and pay high commissions,
- the result for the same project was in a development margin of 20.8 per cent and a profit of $1.85 million.
Property development with no pre-sales requires a level of comfort for all stakeholders that there will be sufficient demand for the end product upon completion.
DFP helps its clients overcome and minimise the effect created by the high presales demanded by banks in the following five ways:
Non Bank No Presales Finance
Advise and arrange Non-Bank construction finance products which do not require presales.
DFP can arrange fast, flexible, finance approvals in days with our specialist non bank underwriters requiring less equity so you can start your project sooner with certainty.
DFP can advise and arrange Preferential Equity “Pref” or Mezzanine Finance to reduce the amount the client needs to borrow from the Bank. This equity underpin enables Clients to spread their cash equity across more projects whilst still maintaining a healthy return on equity.
Preferential Equity can also be used to reduce the Senior Bank debt to a level that marries up with the presales that have so far been achieved. A client may have achieved debt cover to 65% however by injecting Pref to a certain level, the current presale level equates to 100% net debt cover.
Stretch Senior Funding
DFP can provide private funding at elevated loan to value ratios with a pro rata elevated interest rate. This is “pricing for risk” and is another alternative to Preferential Equity. This works effectively when presales achieved are well below what the Bank requires and the equity falls short of Bank hurdles.
Land Bank Funding
DFP can also secure funding for Land Banks that are in the process of securing a Development Consent. In certain instances, the DA lodged (or about to be lodged), is complicit with Planning for that given zoning. The Funder takes the view (following due diligence on Planning Risk) that Council are supportive of the Application so the risk of the Application being rejected is nominal. DFP recently secured 75% LVR on a Land bank with no DA.
Release Equity in the form of Cash
DFP can arrange equity lines of credit from commercial or residential assets which are relatively lowly geared. Often our clients sell down equity in their projects unnecessary in order to fund design, approval, marketing and presale commissions which can be exceedingly expensive way to raise cash.
The cash released via the equity line of credit can be applied to fast track and fund a projects marketing programme which will allow our client to bring their project to market faster.
If you are seeking more flexibility and quicker turnaround times when it comes to funding your development projects, Development Finance Partners can provide expert advice and solutions.
For expert advice:
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