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?
Developers apply for this type of financing once a project is finished, typically in the form of a refinance of an existing development loan. Lenders evaluate the value of the unsold stock to determine the loan amount based on a loan-to-value ratio (LVR) ranging from 50% to 70%. Once approved, the funds are disbursed, enabling developers to repay existing construction loans, invest in new projects, and pay other necessary expenses.
These loans are often structured as short to medium-term facilities (around 6 to 18-month terms) with interest-only repayment options, providing developers with flexibility until the properties are sold. The repayment is usually made through the proceeds of 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. These funds can be used for other projects or business operations without waiting for the sale of all units.
Improved Cash Flow
With residual stock loans, developers can improve their cash flow. These loans can be used to refinance development loans, pay for ongoing projects, fund new projects, and cover day-to-day expenses.
Reducing Financial Pressure
Residual stock loans can help developers repay construction loans, avoiding defaults and maintaining a good credit standing. This reduces the stress of juggling multiple financial obligations after project completion.
Ability to Wait for Better Market Conditions
Without the pressure of immediate sales, developers can hold onto the unsold stock and wait for favourable market conditions, potentially securing higher prices and leading to better ROI.
Bridging the Gap Between Projects
Residual stock loans provide a financial bridge, enabling developers to start new projects or meet other obligations while selling the remaining stock.
Funding New Projects
The funding gained from residual property stock loans can be reinvested into new developments, allowing developers to scale their operations without delay.
Maintaining Business Momentum
Access to residual stock loans ensures developers can maintain momentum, reinvest in their business, and continue building their reputation in the market.
Factors Lenders Consider for Residual Stock Funding
Lenders evaluate several factors before approving residual stock loans to ensure the loan is secure and aligns with their risk appetite.
Property Type and Location
Lenders will consider several factors related to the unsold stocks and the development itself. Lenders may look favourably on properties in areas with high demand or strong resale potential. Lenders may also look at the property type—apartments, townhouses, or standalone homes might be evaluated differently based on market trends. Finally, approval may depend on the location of the development. Lenders may be more amenable to properties in metropolitan areas due to greater buyer interest.
Loan-to-Value Ratio (LVR)
Lenders will consider the properties’ Loan-to-Value Ratio, which is the ratio of the loan amount compared to the property’s appraised value. Most lenders for residual stock loans offer an LVR between 50% to 70%, depending on the project and market.
Valuation Reports
Lenders require professional valuations to determine the accurate market value of the unsold stock. This is how the lender will determine the loan amount for the residual stock finance facility.
Sales History and Track Record
Some lenders may consider the developer’s sales track record before approving a residual stock loan. A history of consistent or high sales indicates lower risk, which means a higher chance of loan approval. Lenders may review the developer’s track record with similar projects to assess their capability to sell the remaining units.
Borrower’s Financial Position
Lenders may scrutinise the developer’s current financial position. They can look at current liabilities and ongoing obligations to ensure they are capable of repaying the loan. Developers with stable cash flow are viewed more favourably.
Market Conditions
Interest rates, inflation, and local economic health can influence a lender’s decision to approve residual stock loans. They need to ensure that the market allows for the successful sale of the unsold units, which means the loan will be repaid.
To Sum it Up
Residual stock finance offers a lifeline to property developers dealing with unsold stock. With the right strategy and lender, developers can unlock equity, reduce financial pressure, and pave the way for future growth. By understanding residual stock loans in Australia and how they function, developers can make informed decisions and maximise their project’s potential.
Unlock the Value of Your Unsold Stock
If you're considering residual stock funding, reach out to financial experts to find tailored solutions that meet your needs. We specialise in helping Australian developers navigate funding solutions that help drive their business forward.
