Property Development - Changing the Funding Model
The Australian property information mill a possible ticking time-bomb with residential investors increasingly devoted to the capital appreciation for returns, whilst commercial property transactions has actively pursued yield based investments in the last 12-18 months. The property market seems buoyed by large interest from offshore investment and local cashed-up investors and developers. The short to medium term outlook for rates seems to be positive, but long term there is an expectation of rising rates - tightening rates from banks are coming into play and access to development finance just isn't as rosy as it was formerly.
The restrictions on institutional lending will end up a growing issue since the major banks need to reduce experience property leading and markets. The marketplace is also adjusting to tightening on foreign buyers and global policy changes happening round the movement of capital outflows for example China. According to Knight Frank Chinese-backed developer's bought 38% of Australian residential development sites in 2016.
Developers/Builders - The Challenge
Developers appreciate you may still find significant opportunity in the market nevertheless the challenge now sits in accessing capital and potentially looking at non-bank capital sources. Key aspects is to consider development design, building services and fabric costs. Stripping back development costs to these numbers can demonstrate chance to extend funding budget and potentially take a look at specialist funding sources.
The expense of funding might rise for the debt side, however, if investor equity is costly, the increase LVRs provided by private funders might provide net decreases within the overall cost of capital. The ability to access this funding without pre-sale quotas transform it into a desirable option for smaller developers.
Typically buildings are increasingly being designed and built to minimum code detaching the costs of all bells and whistles to maximise builder & developer profit. Less consideration and emphasis is put on the new development's ongoing operation and liabilities.
The New Model
What whenever we could invest each one of these additional extras to create a better performing asset with lower operational costs, but not ought to increase the capital budget - in-fact decrease our capital cost by accessing Green Structured Finance (GSF), long-term funding available, subsidised by specialist product funding. This new loan/debt will probably be serviced by the operational savings made from the improved technology and products.
As an illustration, a developer is building and owning a mixed use site for $50m. We consider the design and consuming technologies for the site (ie lighting, solar, metering/embedded network, thermal insulation, glazing performance, energy efficient white-goods, warm water, HVAC).
SFG appraise the ongoing lifecycle price of these technologies. We then build a package outlining which products provide an attractive return based off the predicted energy costs. For this example $5m is taken out of the capital tariff of the project to the improved package. This will reduce the developers Capex and Opex, improving cashflow and returning profit. This reduction of $5M or 10% has the capacity to suited for other projects or contribute to increasing the project LVR and financial make-up.
Green Structured Finance from Sustainable Future Group can be a new method of a tightening development financing market, designed to optimise financial and development performance. We focus on pulling together projects crossing the boundaries of Financial, Design, Advice and Delivery. Contact us to find out how we might help increase your development.