Property Development Finance via an issue of ResiBonds
Are you looking for a property development finance?
Financing property development is a lot riskier for mainstream lenders and therefore their lending requirements are more stringent. There are countless stories where the big banks have pulled back on lending to property developers, in some cases against previous commitments, after sites have been bought, construction started and pre-sales commenced.
If your a small-to-medium size developer or relatively new in this field, trying to get approval on your construction funding is very challenging through the traditional channels and most likely unable to meet their restricted credit criteria.
So now your looking at alternative private lending and want to learn more about how ResiBonds can provide the property development finance unique to your project.
A ResiBond is a new innovative finance product, in which you offer debt securities to eligible investors. The terms and conditions can be structured in many ways, with different variations that are tailored to your projects specific needs and ROI. A small townhouse development on owned land will have different terms to a multi-level apartment project without a DA.
Through ResiBond, you can access the private lending market to fund your construction site and acquisition costs offering attractive coupon rates and terms to investors.
Property Development Finance – What are my options?
As a property developer, there are numerous finance and equity options to start your next project, from standard construction loans from the banks to complex convertible equity and JV structures via the second tier lenders.
Typically, you will not obtain 100% development finance for your whole development from one source (100% cash, debt etc), instead you will have a mix of sources at different rates and terms – also knows as the ‘capital stack’
Your different types of funding will rank on priority, with the highest priority debt (senior) the first to get paid out. The second priority (subordinated debt) will be paid next, then the next ranking (Preferred Equity) and finally common equity (yourself).
The successful property developer would require a range of options to cover all bases and thus lower your exposure to one funding source while controlling funding costs.
- Senior Debt – Usually a bank loan. will make up the bulk of your funding, ranging from 50-80% TDC, rates from 4-8%
- Subordinated Debt – mezzanine finance, 2nd mortgages, and other loans will usually fall in here. Rates can be from 10% up to 25%+ for mezzanine offerings, depending on the project
All debt will be paid off first before any proceeds go to equity holders
- Preferred Equity – Preferred Equity ranks ahead of, and is paid before, common equity. An interest rate will usually be specified (eg 15%) plus future profits
- Common Equity – As the developer this is usually your equity, or equity from a JV or convertible bonds
Property Development Finance Gap
Typically, your first construction loan, usually from the bank, would cover 50-70% of your Total Development Costs (TDC), with the rest coming from your equity, or other owner / developer contributions.
However, the last few years has seen drastic changes to the development finance available and the terms attached to it. The banks (led by the big 4) have cut down on LVRs, and increasing their conditions to drastically cut down on their property exposure.
This is a deliberate move by them, as some would say they may be over-exposed to property in general. The big banks corner the mortgage market, with residential debt making up 66% of banks loan books now
From as early as 2015, when APRA first started fiddling with the rules
The Australian Financial Review has learnt that over 10 finance negotiations between CBA and apartment developers have fallen over at very late stages in the process because CBA has changed its lending terms and required a higher level of loan coverage.
Which has led to decreased funding in property development, as expected
The retreat of Australia’s major banks – prompted by banking regulator APRA – has seen their share of construction debt financing, known as senior debt, fall to about 60 per cent of the total from 75 per cent five years ago, creating a hole for non-bank lenders to fill.
Thanks to our super funds, and entrepreneurial individuals, there are now dedicated mortgage and development funds stepping in to support our industry, with even some super funds developing property themselves (CBUS Super a prominent example)
This is part a result of the low interest rate requirement, and part because the banks have pulled back so suddenly, there’s a vacuum needing to be filled.
Property Development Finance via Resibonds
A ResiBond is an offering designed to help property developers bridge an obvious gap in the financial marketplace.
Typically, our clients use a bond offering to get their first funding, to start development
ResiBonds are issuing a bond. How they fit on the capital stack is up to you, they can be senior or subordinated. A typical example has a bank loan as the Senior debt, with a ResiBond the subordinated debt. The ResiBond can get you started on your acquisition, DA and development, then a bank loan can come it at 50% LVR to finish off your construction
Resibonds have a unique benefit no loan or other funding source can offer – access to multiple funding sources. If you are seeking $2m, each Resibond has a face value of $100k, so you can obtain finance from multiple investors, reducing your risk on each party, and providing a margin of safety for future investments or opportunities.
If you are after property development finance, or even if you already have a loan, contact us for a confidential discussion now, to see how a ResiBond offering can help you.
Property Development Risks
Property development and financing the project is very risky, considering Australia’s tightly held banking system, and relatively small pool of private funds available to the property development sector in comparison with international countries.
There are high barriers to entry, boom and bust cycles and the capital-intensive nature of the sector, including difficult lending criteria. This presents several risks for the property development process and the need for effective risk management strategies to deliver a successful outcome.
Here is a high-level overview of the various property development risk and rating factors throughout the stages of development
- Pre-construction – average risk rating 3.20
- Contract negotiations – average risk rating 3.19
- Formal commitment – average risk rating 3.09
- Construction – average risk rating 3.08
- Post-construction – average risk rating 2.53
Top 10 Property Development Risk Factors;
- Time delay
- Land cost
- Acquisition terms
- Cost increases
- Market and pricing
- Delivery timing
Its extremely importance of mitigate these risk factors to minimize losses. Key strategies to mitigate property development risks are;
In-house management of critical process
Quality assurance procedures
Contractually allocating risk to other parties