With no end to escalating building costs in sight, that are being blamed for several high-profile construction businesses collapsing, developers are turning to alternative funding models to de-risk their projects without the need for presales to get them out of the ground quickly.
“Presales were intended to reduce the risk around property developments, and in normal circumstances, they do provide security for lenders. But in today’s environment of spiralling construction costs, forward selling by developers can trigger alarms for the parties involved,” says Matt Royal, Director at DFP.
“The widely reported case of building giant, Condev seeking to raise a $25 million cash lifeline from developers is an example of how tightly interwoven the financial interests are between the lender, developer and builder,” Royal said.
“The more presales in a project, the less ‘wriggle room’ there is for a developer to negotiate with the lender to secure extra funding to counter rising building costs.
“While the financiers of property developments may be protected to some extent by conservative loan-to-value ratios, they too face exponentially increased risks should the builder collapse.”
In this environment, Royal said it was no surprise that property developers were increasingly turning to financing structures that weren’t dependent on presales. “Zero-presales construction loans, for example, allow developers to start and complete projects faster, while providing the flexibility to sell or hold back stock, to take full advantage of market movements.
“The rapid escalation in building costs over the past couple of years has taken the industry by surprise, but it needn’t cause insurmountable issues where developers haven’t forward contracted.
“It’s the practice of locking in sales, while the build cost is still rising that causes the problem. It deprives developers of the flexibility to meet changing market conditions by raising their prices along with rising input costs, leaving their profit and risk margins under pressure.
“The net effect of presales in this current volatile market is to create added risk for financiers, property developers and builders,” Royal added.
Zero-presales construction loans may incur marginally higher fees and charges, but these costs can be offset by the benefits.
“Projects can be initiated sooner and with less upfront equity because there’s no need to fund expensive marketing campaigns and deliver presales agent commissions to investment sellers, who are generally engaged to shift stock well before a project is completed,” Royal said.
“Engaging in presales can also introduce a new form of valuation risk by making it more difficult to sell the remaining stock later at a more realistic price.
“Developers know that marketing completed stock is easier and cheaper than selling off the plan.”
If you’re looking for finance solutions that can de-risk your next project by eliminating the need for presales, then DFP can help. We have written over $3 billion in loans for Australian and international property developers and can arrange fast and flexible finance approvals to suit your project, from large to boutique.
Our network of capital partners is extensive, so we understand who is in the market, for what type of project and developer, on any given day, and we can find innovative solutions requiring less equity so you can start your project sooner.
Book a discovery call with the DFP finance team.