Castlerock Capitals’ Castle Student Accommodation in Sydney was thriving as a boutique student accommodation in the heart of Newtown for international students—and then the pandemic hit.

Although managing director Stephen Scutts moved fast to offset the challenges presented, as an experienced property developer he knew he would face difficulties refinancing with the conservative banks. Scutts turned to finance experts Development Finance Partners (DFP) to secure the best deal during a challenging period.

Refinancing in a pandemic

Castle Student Accommodation hit the ground running. Within two weeks of receiving the occupation certificate from the council, the building was filled and achieved record rents for the Sydney market.

When Covid hit, the building maintained occupancy for the first semester but then many international students returned home. Scutts and his team adapted quickly, lowering rents and focusing on the property’s location and top-class amenities, successfully brought tenants from interstate and New Zealand.

“We proved the model worked and, even in tough times, we can survive with only domestic students—it’s all about providing top-shelf products,” Scutts said.

But despite the project’s success, when it came time to refinance, Scutts knew he would face difficulties getting a good deal with one of the big four banks.

“The banks now see student accommodation as a tough market because the international students can’t get here,” he said.

“If your revenue is down by 35%, your valuation is down by the same amount and therefore, your borrowing capacity is going to be limited, so we needed to try to stretch the LVR.”

Scutts had approval from one of the 'big four' banks but wasn’t satisfied with the LVR and was concerned the bank could change its mind.

“I took that same offer to Baxter Gamble at Development Finance Partners, and they provided the best solution. Less equity in and a better interest rate than we were getting from one of the major banks and a lot more flexible. ” he said.

Deal 'blew the big four out of the water'

DFP secured funding of $10.15 million with one of its preferred banks for refinance from the existing construction facility loan, at an LVR of 61.50% of the current completed asset value.

The 36-month loan term had a variable interest rate, which was 2.45% per annum at the time of writing.

“Before dealing with DFP, the banks wouldn’t get us close to that LVR, and we were getting rates quoted in the high 2’s,” Scutts said.

To secure the deal, DFP undertook a detailed assessment of the asset, identifying any potential issues and the overall credit strength of the proposal. The credit process included financial modelling and cash flow of the asset and income to fully assess the transaction risk.

DFP also assisted Castlerock Capital in submitting a DA amendment, which allowed the building to be tenanted by both students and non-students. This made the transaction more favourable to the bank as it further mitigated the leasing risk.

“We were roosters two years ago in terms of property investment, then Covid hit. It was stressful during this period, but DFP were level-headed all the way through,” Scutts said. “Baxter is straightforward, level-headed and what he said was going to happen, happened. I have confidence in Baxter.”

Why Development Finance Partners?

Stephen said the decision to work with DFP came down to their experience, contacts and track record of delivering.

“It’s very hard for a person like me to talk to every financier in town, every bank and every third-party lender, because each one requires a relationship. You’re best off using DFP to do that, because they know my situation, they know the business and they know who to slot it with", Scutts said.

Scutts said DFP were easy to deal with and he valued the stability they provided.

“Banks are difficult to talk to sometimes. They can quickly change relationship managers but dealing with private people like Baxter, you know they’re going to be there,” he said.

“With anything in property development, you’ve got to get good people. You pay peanuts, you get monkeys, so you’ve got to get great consultants.”

In fact, Scutts is already talking to DFP about future projects.

“We’re definitely going to continue working with them, they’re experts in their field,” he said.

“We know what we do best, and we will continue to do that and let the people like DFP do the finance for us.”

DFP are easy to deal with, they know a broad spectrum of lenders and who’s going to like what we’ve got. It’s a matter of then working out who we best fit with and it’s something they do well. They’re experts in that field.”

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