Property Development has many risks, one of which is the ability to repay the construction loan from the sale of the completed product.
As is human nature, different property developers and lenders have differing risk tolerances.
One developer might be prepared to build entirely “on spec” (speculatively, with no pre-sales), and a lender might be prepared to allow this to occur. This often sits squarely in the Private Credit sector – but believe it or not, we fund several single-home and townhouse developments on-spec with banks.
However, many developers prefer to get sufficient pre-sales before they’re willing to commence construction. For some, this is to access cheaper bank finance, for others, it’s about seeking market proof of acceptance for their product; many others want to reduce their risk exposure.
In either case, several factors come into play in the decision process, including:
- Bank/Lender credit risk appetites
- Economic-cycle situation of the market, or asset-class therein
- The product type, location and price-point
- What the other local competing projects are
- Who the likely buyers are (e.g. investors vs owner-occupiers)
- The size and scale of the development
There are many situations when it does make perfect sense to proceed with a no- or low- pre-sale strategy. However, there are other situations wherein one should carefully consider whether doing so is taking on too much risk.
Although we have mostly seen strong markets with short supply since late 2020, we have also seen some projects experiencing challenges selling their completed stock at the expected prices – an issue that might not have been faced had they sought pre-sales prior to commencing.
The downside of being in this situation is that you might have a large amount of debt still outstanding and at higher interest rates, as well as a great deal of equity tied up.
All is not lost, however, if you end up in this situation. Provided that your gearing is not too high, “Residual Stock Facilities” are readily available from a wide range of lenders, to refinance the remaining construction debt onto a slightly more affordable loan, which provides time to sell down in an orderly and more patient manner.
At STAC Capital, we are not just about “finding a deal” for our clients – as trusted professional advisors, we talk through and develop risk mitigation strategies together with our clients to ensure that they go forward with their projects “eyes wide open”, while sourcing debt options with varying risk tolerances that suits the strategy of our client.
And if they do end up in a bit of a bind, we’re there to help.
Get in touch with STAC today for smarter financing solutions for challenging situations.
