Getting into property development in Australia can be both exhilarating and intimidating, especially for new property developers. A critical aspect of this journey is understanding and securing property development finance. This article aims to demystify the process, offering insights into various property development financing options and practical tips to successfully navigate this complex landscape.
Key Takeaway Table
| Key Point | Summary |
|---|---|
| Understanding Property Development Finance | Overview of finance types, loan processes, and typical loan-to-cost ratios. |
| Financing Options for New Developers | Exploration of commercial mortgages , bridging loans, private funding, and conditions for 100% finance. |
| Steps to Secure Finance | Guidance on creating a solid business plan, market analysis, and project planning. |
| Overcoming Challenges | Strategies for new developers to navigate common financial hurdles. |
| Real-Life Success Story | A case study demonstrating successful property development finance by new developers. |
Understanding Property Development Finance
Types of Property Development Loans
Property development finance in Australia encompasses a range of loan types, each suited to different stages and scales of development projects.
Key types include:
Commercial Mortgages
Long-term financing used primarily for purchasing land or existing buildings. These are usually interest-only loans while property developers work on planning and permit approval.
Bridging Loans
Short-term solutions for fast funding needs. These loans could be secured or an unsecured loan solution and are often used to bridge a shortfall or extend a project term.
Construction Loans:
Specifically designed to cover construction costs, these loans are typically drawn down in stages as the project progresses.
The Loan Process
Securing a loan involves several steps, starting from the initial application to the final approval. Developers need to present a compelling case to lenders, showcasing the viability and profitability of their project.
Loan-to-Cost Ratios Explained
Loan-to-cost (LTC) ratios are crucial in property development finance. This ratio represents the loan amount as a percentage of the total project cost. Most lenders in Australia offer LTC ratios ranging from 60% to 80%, meaning developers need to fund the remaining costs either through their own cash contribution or additional equity from other property.
Financing Options for New Developers
Commercial Mortgages
Commercial mortgages are a go-to option for many new developers. They offer relatively lower interest rates and longer repayment terms, making them suitable for holding a property they need to settle on quickly if they’re unable to negotiate an extended settlement term.
Bridging Loans
Bridging loans are ideal for developers needing quick, short-term funding. They are particularly useful for covering immediate costs until a more permanent finance solution is in place.
Private Funding and 100% Finance
While challenging, securing 100% finance is possible under certain conditions, such as having additional security to offer, whether that be through a first or second mortgage. Private funding over multiple properties to obtain a loan-to-value ratio within a lender’s credit appetite can be a way to achieve finance approval for your development but it will increase the overall loan costs as well as put the security properties at risk until the loan is successfully completed.
Steps to Secure Finance
Crafting a Solid Feasibility Study
A well-structured business plan that details the project’s feasibility, projected costs, and expected returns is essential and should be the first step every new developer takes. If you haven’t completed a feasibility study before, we’d recommend getting help from an experienced professional.
Understanding the Market
Project Planning and Presentation
Effective project planning and presentation are key. Developers should be able to clearly articulate their vision, backed by realistic timelines and budgets and be engaged with a suitable builder, town planner and solicitor.
Checklist for Securing Property Development Finance for New Developers:
- Complete a Strong Feasibility Study: Ensure your feasibility study is detailed, realistic, and backed by solid market research.
- Understand Your Financial Capacity: Be clear about how much you can invest, your security limitations and the level of debt you can sustain both in the project and afterwards if you plan to hold any residual stock once your development is completed.
- Explore Various Property Development Financing Options: Don't expect your local bank to fund your first property development; consider private lenders and non-bank options.
- Prepare for Higher Costs: Factor in potential cost overruns in your financial planning and have a contingency to avoid getting caught out.
- Establish a Strong Relationship with an Expert in Property Development Finance: Building trust and a positive track record with lenders can open doors to better financing options.
- Be Transparent and Responsive with Lenders: Honesty about your project's risks and potential, combined with prompt responses to questions, will help build confidence with a lender.
- Stay Informed About Market Trends: Keeping up-to-date with market trends can help you make informed decisions and impress lenders.
Overcoming Challenges in Property Development Finance
Common Financial Hurdles for New Developers
New developers often face several challenges in securing property development finance. These include limited track records, higher perceived risks by lenders, and sometimes a lack of industry connections. Understanding these hurdles is the first step towards overcoming them.
Strategic Solutions and Tips
To navigate these challenges, developers should focus on building a strong portfolio, even if it means starting with smaller projects. Networking within the industry can also uncover alternative financing options and valuable advice. Additionally, being flexible and open to different types of financing can increase the chances of securing funding.
New Developer Real-Life Success Story
Case Study: Tax debt problems leading to a $4.5M development financed
A property developer came to us with an urgent tax problem to solve. They had residual stock they were waiting to sell in an effort to clear tax debt—they were running out of time and their sales had been too slow.
Using a combination of 1st and 2nd mortgages over their properties, we demonstrated how we could fund their tax debt shortfall and get them out of trouble fast.
It also turned out that a business partner of theirs was stuck with their first development. After funding the purchase of the site, with all lots presold, their existing investor refused to provide the funds to complete, which left a gap of $1.5M in construction costs that needed to be financed for the project to reach completion.
Assessing the deal, we approached a lender proposing they fund the development based on the GRV outcome. The pre-sales supported this and led to an offer to refinance the existing first mortgage and an additional $1.5M to fund to completion.
Dark Horse Financial is an Expert In Securing Property Development Finance for New Developers
Securing property development finance can be a challenging journey, especially for new property developers in Australia. However, with a thorough understanding of the finance types and a strategic approach to overcoming challenges, it is certainly achievable. Getting adequate knowledge, being more persistent and securing the right partnerships are key to unlocking the doors to successful property development finance.
To talk to an expert to assist with your property development, contact us here.
