Development finance is getting harder to get

Development finance is getting harder to get as banks pull back leaving private lenders to fill the gap

Banks have pulled back on lending to property developers requiring them to jump ever rising hoops to get their project approved for funding. One of the most important requirements is needing to provide pre-sales equal or in excess of the debt amount. Debt coverage from pre-sales can reduce the banks risk as there is less chance that the developer (and therefore the lender) will be stuck with the finished development that owes money to the bank but does not have the sales to repay the loan.  However, this can make it much more costly for the developer who needs have someone convince buyers to buy their product ‘off the plan’ prior to starting the development. This means that project marketers are hired who charge hefty fees for such a service. Furthermore, the developer’s holding costs (to hold the development prior to commencing) which can include finance cost on the land etc… are increased making the development less profitable. Sometimes the developer will need to discount the price of the off the plan sales to get them and this can lower the value of the entire project as later sales if reliant on a home loan can result in lower valuations that are based on the earlier discounted pre-sales, compounding losses in profitability.

The alternative is to use private lenders who do not require as much or any pre-sales. These private lenders will often approve the project if the numbers stack up even without any pre-sales. In this way the developer can more easily get the properties sold as the buyers can see that construction has commenced and that the completion time is more firm.

So what is the drawback from using a private lender? Well the cost of the loan is more expensive. Private lenders expect to charge a premium for the risk that they take by funding a development that is considered as to risky for the banks. This can turn some developers off as they look at the extra cost of the finance.

However, when considering the additional time and cost of the project marketers getting pre-sales ,the additional cost of increased finance can often more than offset this and allow the project to get off and running sooner.

In the end if the project can’t afford the additional cost of private funding then it probably can’t afford the cost of project marketing and probably should wait until banks are willing to fund these types of deals again.

If you do have sufficient profitability in your property development project and want to get it moving then private funding can be the way to go. Check out Oak Laurel property development funding to see what options you have.

Oak Laurel are specialist in getting you funding for your development project when the banks have said NO!

 

 

Development finance is getting harder to get