Development Funding 101

Navigating Australia's Housing Supply Shortage

As the Australian housing market faces an ongoing supply shortage, Master Builders Australia forecasts over a million builds will start between July 2024 and June 2029. However, with bank funding becoming harder to secure for developments, alternative solutions offering flexible funding structures are increasingly essential.

Here’s a comprehensive guide to understanding development funding for property apartments, units, and townhouses.

Defining Development Funding

Development funding refers to loans used to finance construction projects, including building multiple properties under one title. This funding is categorised into residential and commercial development loans based on the project’s size:

Residential Development Funding: Suitable for projects with up to four units, such as townhouses, duplexes, and triplexes.
Commercial Development Funding: Required for projects exceeding four units, involving more complex application processes and documentation.

Types of Development Funding

The choice between residential and commercial development loans depends on the number of properties you plan to build:

Residential Loans: Easier to obtain, with a simpler application process. Limited to four buildings or fewer.
Commercial Loans: Necessary for larger projects, involving higher interest rates and more stringent requirements. Non-banks and private funders often offer more flexibility than major banks.

The Development Funding Process

Development funding works similarly to residential construction loans, with funds released in stages as progress payments:

Pre-Sales Requirements: Pre-sales are critical, serving as 'debt coverage' for lenders. Major banks typically require 100-110% pre-sales, while non-bank and private lenders may accept minimal or no pre-sales, though at a higher cost.

Valuation: An ‘as if complete’ valuation by a panel valuer is essential, determining the loan amount based on the project’s value upon completion.

Building Contract: Lenders require a standard building contract outlining costs, timelines, and responsibilities.

Quantity Surveyor’s Report: This report details project costs and stages, ensuring accurate cash flow analyses and reducing borrowing risks.

Council Approved Plans and Permits: Necessary to confirm the project is ready for construction.

Income Verification: Major banks require traditional income proof, while non-banks and private lenders may accept alternative documentation.

Key Features of Development Funding

Interest Payments: Instead of monthly payments, interest is set aside and payable at the loan term’s end, aiding project cash flow.

Loan-to-Value Ratio (LVR): Varies between 50-80%, depending on the lender and project specifics.

Higher Interest Rates and Fees: Due to the associated risks, expect higher interest rates (7-12% per annum) and establishment fees (starting from 1% of the loan amount).

Restricted Costs: Funding typically covers only “hard” costs (labour and materials), excluding expenses like DA approval and architect fees.

Why Choose Alternative Funding Solutions?

With traditional bank funding becoming less accessible, alternative funding solutions provide vital flexibility for developers:

Less Stringent Pre-Sale Requirements: Non-bank and private lenders may require fewer or no pre-sales.
Simplified Approval Processes: These lenders often offer faster, more tailored financing options.

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Understanding the nuances of development funding is crucial for navigating the complexities of property development in Australia. By leveraging flexible funding structures and strategic planning, developers can successfully manage their projects and capitalise on the forecasted building boom.

If you’re a developer looking to secure flexible funding solutions for your next project, contact us today to explore how we can help you navigate the development funding landscape and achieve your investment goals.