Fork In The Development Finance Road: Which Path To Take?
When looking for finance for a project, one of the first questions many developers ask is: “what are the fees and the interest rate?”. Although nobody wants to give their money away to a lender, when considering a development strategy from a holistic point of view, this can often be not only a false economy, but can in fact significantly reduce a developer’s Return on Equity (RoE).
For developers with smaller projects (usually 20 units or less), Senior debt from non-bank lenders at higher interest rates can actually be a particularly attractive option, as the true cost of major bank funding can be far higher than just the finance cost.
This true cost is predominantly affected by two factors:
- Achieving a Pre-Sale Hurdle: Most developers pay 6 to 10% commissions (and/or rebates/incentives) to access investment buyers, in order to get a project started;
- Project time frame: This is the cost that is not quite as obvious, nor as easy to calculate, but to a developer who has a pipeline of projects it is very important nonetheless, as the faster you can get your profit out, the sooner you can move on to the next project.
As an example of the effect of these factors, here is a realistic comparison of bank vs “no pre-sale funding” for a typical 20 unit project:
Furthermore, this example doesn’t even take into account any rebates or incentives to buyers, or the positive effect on a pipeline of other projects by shortening this project’s timeframe by a number of months.
Entering the construction phase without pre-sales does create a different risk profile – and one that should not be ignored. DFP’s Advisory services assist developers to assess and mitigate these risks prior to structuring and placement of finance, to ensure that their position and project variables are appropriate for such a strategy.
Whilst the market for “no pre-sales funding” is relatively thin compared to the pre-GFC days, Development Finance Partners have the proven capability and experience in structuring and settling transactions in projects of all sizes, natures and locations.
