How development finance works 

One of the most significant assets property developers possess is the uplift in value from the building process. When the bank won’t fully consider the end value of your project, what can you do?

Find out how to maximize ROI and make your subsequent property development run more smoothly. 


Now that you’ve started making plans, you can begin thinking about money. When you’ve identified an excellent property development opportunity and consider how development finance works, it pays to go one step further. Often at this point, the most poignant question to ask is how can you make property development finance work for you? 


There are several reasons to approach property development finance in that way. Experienced developers will know that choosing the right finance can be the most crucial stage in any project. Getting the decision wrong will set the tone for the entire development. If the development finance lenders have too many requirements, that can lead to multiple, regular delays, resulting in high costs. Even if the finance contains some contingency, it can still result in an incredible drain on potential profits. 


Traditional development finance lenders – delays and funding conditions 


Making a wrong choice is a double-edged sword for property developers. Likewise, choosing the wrong development finance option can leave you far less wriggle room when delays and problems occur. Not all property development finance is created equal. Different lenders and development finance partners bring various attributes to the table.  


Banks, for example, tend to approach development finance much like other forms of lending. Like any investor or lender, the bank will assess your application and project based on risk – but many developers feel little consideration for development benefits. 


It’s a real thorn in many property developers in Australia. Tighter lending requirements can drain profits fast. Even upon approval, traditional property development finance lenders won’t release funds all at once. You’ll still be required to jump through many hoops during the construction or development process.

Here’s a typical example of how the bank might release funds during a property development project: 


  • 10% once the building contract gets signed.
  • 10% after site clearance and upon the slab, drainage, and essential groundworks completion.  


  • 20% once the developer reaches the completion of the framing stage.  


  • 15% more once the lock-up phase is complete, with the roof on, windows and doors fully installed, and external cladding complete. 


  • 15% once internal lining or gyprock is completed, including ceilings and walls and first-fix plumbing and electrics.  


  • 15% after the second fixing of plumbing, joinery, electrical equipment, and flooring. 


  • 10% on completing painting and decorating, both inside and out. 


  • 5% final payment upon final property competition, when all relevant certification has been issued.  


It’s not just that rigid lending requirements can leave you less able to deal with delays; traditional lending methods can cause hold-ups. Many lenders will insist on carrying out detailed on-site inspections after each phase of construction has been completed, and they won’t release funds for the next stage until everything has been approved and ticked off. That can lead to frustrations and costly delays for developers. 


Development finance in Australia: Banks Vs. private and GRV 

Rigid lending requirements and costly delays during your project are not the only drawbacks of qualifying for development finance. These days, applying for development finance in Australia with a bank can be an extremely time-consuming endeavour – and no matter who considers financing your development finance property, a yes is never guaranteed. 


The fewer factors a lender considers, the less likely a time-consuming finance application is to get approved. Narrower qualifying requirements mean you’re forced to rely on aspects like pre-sales and a deposit rather than project potential. Whereas a bank might ask you to cover up to 100% of lending by making sales off the plan, a private development financier is more likely to look at GRV (Gross Realisation Value).  


It sounds complicated, but if you and your project tick some specific boxes, a private mortgage manager will look beyond the value of your land or existing building and assess your development more as a property developer does. That’s GRV, and it opens up many possibilities. You’re no longer confined to guarantees based on existing land valuation and signatures on contracts for yet-to-be-built apartments or houses. It means property developers can exploit the value that attracted them to the project in the first place – and that’s the end value. 


It makes sense for developers that a financier or investor would consider GRV when deciding. After all, property developers and builders deal partly in the currency of potential. If that potential didn’t exist, profits would be significantly reduced at best and at worst non-existent. When you start looking at development finance in this way, it can seem like the bank wants to take a minimal risk or no risk at all for their slice of your profits – and in turn, that may seem a little unfair. 


The reality for developers is that banks operate in a space that leaves less room for considering development potential. It’s just not how banks work. Many experienced developers will tell you that the resulting options aren’t fit for purpose. They can work out slower, costlier, and provide far less convenience and efficiency during a build. 


The benefits of private development finance in Australia

In short, GRV allows property developers to unleash much of the potential revenue in a project at an early stage, but that potential relies on the above factors. Because private mortgage managers look at projects more like a developer would, development finance property must show that potential and mortgage managers can see both a viable exit and a solid return. Once that’s satisfied, developers can enjoy far fewer ongoing requirements during the build, resulting in fewer hold-ups:  


  • Little or no pre-sale requirements: Experienced developers know that often, they stand a better chance of achieving optimal prices for stock once building work is complete. That can be especially true for higher-end development finance property because potential buyers can see and touch quality finishes and stand inside apartments or houses and imagine living there. Buying off the plan isn’t always ideal. For most homebuyers, home or apartment is the biggest spend they’ll ever make, and so when a developer has enough breathing space to finish a build before sales, it can lead to an upturn in sales and profits.  


  • Faster time to site: A lack of pre-sale requirements can see property developers getting projects out of the ground quicker. Relying on the bank often means developers are forced to sit on a viable site while spending money on marketing and achieving pre-sales. That risk is furthered because banks and traditional property finance lenders have more requirements, so applications are slower. Private mortgage managers can assess projects more quickly and put fewer barriers between developers and getting workers and machinery on the ground. 


  • More favourable equity requirements: Appraising a project based on GRV or end value has additional advantages for developers. Traditional development finance lenders tend to assess based on total development cost, or TDC. Banks, for instance, might only be prepared to fund 75% of the TDC, which typically comes with some pretty hefty pre-sales requirements. Up to 50% or more in some cases, depending on how traditional development finance lenders perceive the risks associated with a specific project. Private financiers base appraisals on GRV, which enables them to associate a lower risk with advancing a more significant portion of the TDC – and that means borrowers require lower deposits.  


  • Potential increases in land value: Agility often helps clients sitting on a block of land for some time. That could be because they’re busy finishing a previous development or combining that and applying for a DA. That process can be highly time-consuming. By the time you’re ready to begin building work, your plot may have undergone a considerable increase in value solely based on the market and because adding a DA provides an upturn in value. Appraising based on GRV allows private financiers to advance a far more significant chunk of TDC when that happens. Sometimes, that will extend to the lion’s share of the land cost and all of the build expenses – and again, that typically absolutely no pressure to sell apartments, offices, or houses off-the-plan. 



How to qualify for property development finance in Australia 


The good news is that specialist mortgage managers like Agility take a more developer-friendly approach to property development finance. Every project is judged by its merits. While that can lead to far more versatile solutions that serve developers end-to-end on a project, they’ll still need to present a viable, financially sound proposal to qualify. 


Neither private mortgage managers nor banks will finance a project that poses too many risks or doesn’t look profitable on paper. The real difference here is in how different development finance options appraise projects. All finance providers are regulated, and nobody wants to get stuck with a borrower that can’t afford to exit a project successfully. Both private financiers and banks also both expect a return on their investment – and that means a developer needs to bring something that works to the table: 


  • The design and scope of the project: The development needs to make sense. Mortgage managers will want to see a well-planned project with effective marketing and a schedule outline. Like developers, all property investors and private development financiers will need to see a smooth path toward a clear exit within a reasonable timeframe.   


  • Is there a return on investment? No mortgage manager wants to be involved in a project that doesn’t promise to return a profit. Even though many private property financiers won’t insist on pre-sales, they’ll need to see evidence that the developer has the prospect of future sales. They’ll look at where it is, and if the development is an apartment complex, they’ll consider apartment sales in that locality. 


  • Who’s involved in the project? For private mortgage managers, the people taking on a project play a big part in defining its future success and a reasonable return on their investment. Getting a property development across the line is a long haul, and relevant experience will be highly regarded.  – are the people behind the development experienced? 



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