Acquiring funding can be tough for property developers. There’s plenty of rigorous paperwork to conduct, plenty of I’s to dot and T’s to cross. And even if you get your loan application just right, the project itself may not be what the lender is looking to tackle at this point.
In our recent Developer’s Corner video interview, industry leader Renato Sturma of Finance Advocates stated that funding has become more difficult to obtain this year, with the banks tightening up and becoming more selective, increasing their levels of pre-sales and LVRs due to their wariness around market speculation.
However, it’s not all doom and gloom, not by a long way. There are plenty of projects being approved every day and it’s just a matter of selecting projects that meet today’s funding criteria, things like location, competition, construction costs, pre-sales, experience of developer, financial strength of the developer and of course what type of property development it is.
With this in mind, we’ve compiled an overview of 3 types of property developments that have greater potential of getting funded in the current business environment.
1. Smaller townhouse splits
Not so long ago, banks were funding larger, more commercial townhouse projects but now it’s the smaller, less risky propositions the banks are favouring.
Townhouses continue to be a popular choice in cities, especially among first home buyers, young families, empty nesters keen to downsize and investors seeking a competitive return for a smaller outlay.
But there’s simply less risk attached with a small house being subdivided or rebuilt than for a whole block of land that requires major logistics, management and capital investment.
Another key reason for funders preferring small scale townhouse operations is due to the resistance of many councils against high-density developments, which some councils are restricting in order to contain residency rates and character of neighbourhoods.
But townhouse projects are ever-popular, which is why small conversion-style townhouse developments continue to get funded.
2. Commercial retail, industrial or land-based developments with high pre-sales
Like townhouses, commercial developments with a retail or multi-site focus will always be popular. But commercial projects usually require substantial capital and, with banks craving security, the onus is on the developer to attain high levels of pre-sales before submitting their commercial site proposals.
Any funder will look at a project much more favourably if investors have already seen value in the project and bought into it, and commercial property developers can generate strong pre-sales with clear development plans that promote consistent, predictable cash flow and a promising timeline.
3. Office/co-working spaces in growth areas
Leading town planner Hugh McKenzie has seen development applications for offices and co-working spaces skyrocket in recent times. The majority of these sites are located in major cities, but interestingly, inner-city growth suburbs also appear to be on the rise.
Location is crucial for these projects with funders more likely to reward developers who propose a great, innovative building concept in a growth area. Another reason why growth suburbs are attractive to funders is due to high-supply areas being blacklisted.
This ties into the co-working space trend, which has exploded In Australia in recent years. Leading real estate development firm CBRE has noted that large companies have pushed co-working spaces higher on their list of priorities, whether it’s to house a small team or to send employees to recharge the creative batteries once a week or so.
The beauty of co-working spaces, aside from the supposed benefits to focus and creativity, is that the locations don’t have to abide by the traditional office models. In fact, since flexibility is key, co-working spaces can open up in just about any residential area.
So there you have it. We hope this has aided you on your property development journey. For further insights, check out other informative articles on our Development Ready blog and also check out our latest property development site listings.