Case study: Bank vs Non-Bank Development Finance is NOT Clear-Cut

by | 5 Jan 2022 | Case Study, Property, Property Development, Residential

Keystone Urban Developments, a long-term client of STAC Capital, asked us to provide them with various development finance options for their next townhouse project, comparing key factors including the cost of debt, pre-sales requirements and gearing (LVR and LTC/LCR).

The Challenge

Comparing Bank vs Non-Bank funding for projects less than $20m or so, is heavily weighted on pre-sale requirements and the OVERALL impacts to the feasibility. Note the emphasis on OVERALL – as in, not just the finance cost in isolation, rather the NET EFFECT on the BOTTOM LINE.

For instance, if the project is targeted towards owner-occupiers, would it make more sense to sell your stock upon completion, potentially achieving higher sale prices when buyers can “see and touch”, experience the homes and the surroundings first-hand?
The higher cost of non-bank finance can often be completely offset – or even result in an even higher net profit – by achieving higher sale prices, combined with reduced agent commissions versus off-the-plan sales.

Furthermore, not having a pre-sale hurdle also allows construction to commence immediately, thereby allowing the developer to get their equity back out earlier, which in turn allows them to move on to the next project sooner (think about that over the longer term – if you can get your money in & out of a project every 15 months instead of 20, you could do 4 projects in 5 years instead of 3 – what could you turn your equity into, by doing an extra project every 5 years?).

Our Approach

Undertaking a market tender for Keystone’s townhouse project, we negotiated terms with multiple Banks and Non-Banks. As expected, the non-banks provided nil-presale options with their higher cost of funds; the banks mostly wanted 100% or close to 100% debt cover from pre-sales, with their low interest rates & fees.

However, leveraging the experience of Keystone as a developer, as well as the strengths of the project itself, we pushed the banks to accept a lower pre-sale hurdle.

The Outcome

Knowing what levers could be pulled, we were able to negotiate funding with a Major Bank, negotiating only a 50% debt cover hurdle, providing cheap finance and therefore an increased Return on Cost.

With a pre-sale hurdle at this level, this meant they only needed to sell around a third of the townhouses in the project – finding a nice balance of (1) being able to start construction quickly, (2) risk-mitigation by having a good level of debt-cover, (3) lower finance cost and, (4) the opportunity to “drip-feed” the sales of the majority of the project during and post-construction, to achieve a higher GRV and profit.

This case study shows that the decision between Bank vs Non-Bank funding isn’t necessarily black & white. You’ll no doubt read plenty of brokers and financiers touting that non-bank development finance is the be-all and end-all, the best decision to make — and we’ve certainly touted the benefits of non-bank finance many a time.
However, the choice between Bank vs Non-Bank should be the result of due consideration and analysis of each option, including your own risk appetite as a developer & investor.

At STAC, we always start with YOUR STRATEGY – what makes sense for your business in the long-term, for your project and pipeline, for your own goals and risk appetite. We then build a funding strategy around that. You and your project are not the same as every other developer’s, so the best debt solutions for you aren’t necessarily the same as for others.

If you want to work out what the best financing options for your next project are, FOR YOU, get in touch with us now.