Key Takeaways
- Residual stock finance is a type of loan secured against the equity of unsold units in a development.
- This type of financing is designed for property developers with finished projects but still holding on to unsold units.
- Residual stock finance can be used to pay off development loans, pay for ongoing projects, fund new developments, and cover day-to-day expenses.
- Lenders assess the value of unsold stock, offer loans based on a loan-to-value ratio (LVR) of 50%-70%, and structure repayments as short- to medium-term facilities, often interest-only.
- It's a great way to reduce financial pressure, allowing developers to wait until market conditions are more favourable to sell the units instead of lowering their prices just to attract buyers fast.
- Lenders evaluate the type of property, location, LVR, property value, current market conditions, and the developer's financial position before approving residual stock loans.
Residual stock finance is a financing option for developers with finished projects but still have remaining unsold units. This residual stock finance guide provides an in-depth look at how this financing option works, its benefits, and the factors lenders consider when approving this type of loan.
What Are Stock Residuals?
Stock residuals refer to the completed but unsold properties in a development project. These could be apartments, townhouses, or even individual land parcels that remain after a project’s primary sales phase. A developer can end up with a lot of unsold stock due to factors like an economic downturn or unfavourable market conditions.
Residual stock is often a developer’s last hurdle in turning a project into a success. Through residual stock finance, developers can leverage these unsold properties to maintain cash flow and avoid financial strain.
What Is a Stock Residual Loan?
Residual stock finance refers to a loan secured against the unsold units of a finished development. This type of financing helps property developers manage the financial burden of unsold stock. Developers can hold on to their stocks until market conditions are more favourable for selling, allowing them to set a better price and maximise their return on investment.
How Do Residual Stock Loans in Australia Work?
This kind of financing is usually requested by developers after a project is done, and it usually comes in the form of a refinance of an existing development loan. Lenders use a loan-to-value ratio (LVR) of 50% to 70% to figure out how much to lend based on the value of the unsold stock. Once the loan is approved, developers can pay off existing construction loans, put money into new projects, and cover other costs.
These loans are usually set up as short- to medium-term loans (6 to 18 months) with interest-only repayment options. This gives developers some time to sell the properties. Usually, the funds needed to pay back come from the sale of the unsold stock.
Benefits of Residual Stock Loans
Here are some of the key benefits of residual stock loans for developers:
Unlocking Equity in Unsold Properties
Residual stock loans allow developers to release equity tied up in completed but unsold properties. You can use these funds for other projects or business operations right away, without having to wait for all the units to sell.
Improved Cash Flow
Residual stock loans help developers get more cash flow. You can use these loans to pay for ongoing projects, start new ones, refinance development loans, and pay for everyday costs.
Reducing Financial Pressure
Residual stock loans can help developers pay off their construction loans, which keeps them from defaulting and keeps their credit score favourable. This makes it easier to handle a lot of financial obligations after the project is done.
Ability to Wait for Better Market Conditions
Developers can keep unsold stock and wait for better market conditions without the pressure of making sales right away. This could lead to higher prices and better ROI.
Bridging the Gap Between Projects
Residual stock loans give developers the money they need to start new projects or meet other obligations while they sell the remaining stock.
Funding New Projects
Developers can quickly scale up their operations by reinvesting the money they get from residual property stock loans into new projects.
Maintaining Business Momentum
Residual stock loans give developers the money they need to keep moving forward, reinvest in their business, and keep building their reputation in the market.
Factors Lenders Consider for Residual Stock Funding
Lenders look at many factors before approving residual stock loans to make sure the loan is secure and aligns with their risk appetite.
Property Type and Location
Lenders will look at a number of things about the unsold stocks and the development itself. Lenders may prefer properties in areas where there is a lot of demand or where they can be sold again for a good price. Lenders may also look at the type of property. Depending on market trends, they may look at apartments, townhouses, or single-family homes in different ways. Finally, the location of the development may affect whether or not it gets approved. Lenders may be more willing to lend on properties in big cities because more people are interested in buying them.
Loan-to-Value Ratio (LVR)
Lenders will look at the Loan-to-Value Ratio of the properties, which is the amount of the loan compared to the appraised value of the property. Most lenders for residual stock loans give you an LVR of 50% to 70%, depending on the project and the market.
Valuation Reports
To find out the real market value of the unsold stock, lenders need professional appraisals. The lender will use this information to figure out how much money to lend for the residual stock finance facility.
Sales History and Track Record
Some lenders may look at the developer’s sales history before giving them a residual stock loan. A history of steady or high sales means less risk, which means a better chance of getting a loan. Lenders may look at the developer’s history with similar projects to see if they can sell the rest of the units.
Borrower’s Financial Position
Lenders may look closely at the developer’s current financial situation. They can check their current debts and ongoing obligations to make sure they can pay back the loan. Lenders like developers who have a steady stream of cash flow.
Market Conditions
A lender’s decision to approve residual stock loans can be affected by things like interest rates, inflation, and the state of the local economy. They need to make sure that the market will let them sell the unsold units, which means the borrower will be able to pay back the loan.
To Sum it Up
Residual stock finance is a way for property developers who have unsold stock to get help. Developers can unlock equity, ease their financial burden, and set the stage for future growth with the right strategy and lender. Developers can make smart choices and get the most out of their projects by learning about residual stock loans in Australia and how they work.
Unlock the Value of Your Unsold Stock
If you're thinking about residual stock funding, talk to financial experts to get personalised solutions that work for you. We help Australian developers find funding solutions that help their businesses grow.
