How Do Property Developers Survive Financially?
Tom Hanks found his soul mate volleyball, “Wilson”, when he was isolated on a deserted island – Wilson was his lifeline.
And with banks’ restrictive policies and attitude towards development finance, the key question is: How are today’s property developers surviving? What is their Wilson?
Banks’ current approach
Banks consider a property development to be 3 or more land subdivisions, townhouses, apartments/units or house and land packages.
For a residential project such as these, banks will typically consider lending up to the lesser of:
- 65% of Gross Realisation Value (GRV) excluding GST, or
- 70-75% of Total Development Cost (TDC) excluding GST.
Before releasing funds, however, typically banks will require the developer to achieve close to 100% net debt coverage.
What does this mean for a project?
So let’s look at what this means for a project with GRV of $11 million:
A bank will consider lending up to $6.5 million.
The developer will therefore need to achieve not only $6.5 million in presale, but also another $650k to cover GST as banks require net (of GST) debt coverage. So, for this project, $7.15 million gross presale will be needed.
But wait, there’s more – not all presales are the same…
Banks actually require the majority of the presales are to be to local buyers (i.e. Australian citizens or permanent residents), as they will only recognise up to 15-20% of presale value being to overseas buyers, some cases no overseas buyers would be allowed.
The presale roadblock
So it is becoming clear that presale is fast becoming the number 1 roadblock for property developers.
Why? While satisfactory presale is the key for banks to trigger the loan drawdown, in reality, some projects can take up to 12 months (or more) to meet the requirement. This prolonged timeframe can significantly increase project holding costs, and thus considerably dilute overall project return.
Where’s Wilson?!
So what can property developers do to find their “Wilson” – a lifeline within these conditions?
Developers must negotiate favourable presale requirements in order to survive.
Banks will consider flexibility on presale requirements based on factors such as:
- Developer experience
- Project details
- Current presale status
- Builder and project manager quality
- Marketing strategy
- Loan amount
- Lending to Value Ratio (LVR)
- Alternative income sources
A successful presale negotiation could result in a 10-20% presale reduction for developers. In fact, in some cases banks will consider removing the presale requirement entirely. These significant negotiations around presale terms can be a project’s lifeline – its “Wilson”.
The Key Is To Present The Right Information In The Right Way To The Right Bank.
Are you considering a development project? Need help negotiating finance?
Balanz can help. Contact George Sha on George.Sha@balanz.com.au or 0421 548 747
Balanz – Your Partner in Business Finance
Website: balanz.com.au Address: Suite 1/220 Boundary Street Spring Hill Qld
