We do, it’s just at a later stage of the project. Each of our development projects go through at least two phases of funding. The first phase occurs at the beginning of the project to fund land acquisition. The second occurs approximately half-way through the project to fund construction.
To understand our funding process you first need to understand how banks and lenders provide loans. Lenders require a certain amount of capital to be present in order to satisfy the loan-to-value ratio in their lending criteria. The reason that we don’t use our own operating capital is that by doing so we would restrict the total number of projects that we can simultaneously undertake, so instead we opt to obtain this capital from investors. This strategy allows us to offer more opportunities across a wider range of projects.
Another key thing to understand is that a property development project only generates a profit at the end, once the properties are sold. In order to mitigate this, the construction loans that we access take advantage of capitalised interest, which means that the interest is paid as a lump sum at the end of the term, rather than in regular instalments.
With these factors in mind, the most efficient and cost-effective way to fund a development project is to use investor capital to fund site acquisition and a construction loan from a lender to fund construction. This funding strategy means that we only have to pay back the loan and investor capital at the end of the project, when there is suitable liquidity within the project to do so.