Tom Hanks found his soul mate volleyball, “Wilson”, when he was isolated on a deserted island – Wilson was his lifeline.
And with banks’ restrictive policies and attitude towards development finance, the key question is: How are today’s property developers surviving? What is their Wilson?
Banks consider a property development to be 3 or more land subdivisions, townhouses, apartments/units or house and land packages.
For a residential project such as these, banks will typically consider lending up to the lesser of:
Before releasing funds, however, typically banks will require the developer to achieve close to 100% net debt coverage.
So let’s look at what this means for a project with GRV of $11 million:
A bank will consider lending up to $6.5 million.
The developer will therefore need to achieve not only $6.5 million in presale, but also another $650k to cover GST as banks require net (of GST) debt coverage. So, for this project, $7.15 million gross presale will be needed.
But wait, there’s more – not all presales are the same…
Banks actually require the majority of the presales are to be to local buyers (i.e. Australian citizens or permanent residents), as they will only recognise up to 15-20% of presale value being to overseas buyers, some cases no overseas buyers would be allowed.
So it is becoming clear that presale is fast becoming the number 1 roadblock for property developers.
Why? While satisfactory presale is the key for banks to trigger the loan drawdown, in reality, some projects can take up to 12 months (or more) to meet the requirement. This prolonged timeframe can significantly increase project holding costs, and thus considerably dilute overall project return.
So what can property developers do to find their “Wilson” – a lifeline within these conditions?
Banks will consider flexibility on presale requirements based on factors such as:
A successful presale negotiation could result in a 10-20% presale reduction for developers. In fact, in some cases banks will consider removing the presale requirement entirely. These significant negotiations around presale terms can be a project’s lifeline – its “Wilson”.
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