Keeping costs down increases the profitability of the project, which increases our returns to our investors. So how do we finance our development projects?
Each of our 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. In short, lenders will only provide a loan to a project once, and only up to a certain percentage of the value of the project. Most lenders will only offer loans with a loan-to-value ratio of around 50-80 percent, and that percentage changes depending on what exactly is being built, and what the loan is for. In general, the larger the size of the project, the lower the percentage that a lender will offer. So we need to be selective about what we get a loan for, to make sure it’s being used most effectively.
A lot of people ask us why we don’t just get a loan rather than raising capital from investors.
And the simple answer is that we prefer to save the loan for obtaining construction finance, instead. By using investor capital to fund the acquisition of the development, we generally avoid the need to make interest repayments, which would place extra financial burden on the project’s cash flow. Using investor capital also ensures that there is plenty of equity in the site, which makes it easier for us to obtain construction finance and gives us more options.
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.
Now, there are some situations where we do obtain mortgages. Sometimes the numbers add up and obtaining a mortgage would be viable—it all depends on the project. But financing a development is more complicated than buying a house, and it’s not as easy as just going to a bank.
When the time comes to fund construction, we have two options. The first option is to obtain a construction loan, and that’s what we do most of the time. Obtaining a loan for construction as opposed to the land purchase is ideal because some construction loans are offered with capitalised interest. This means that the interest is paid as a lump sum at the end of the term, rather than in regular instalments. Again, not having to make repayments during the project is better for the cash flow of the project.
The second option is to also obtain construction funding from investors. Normally, a construction loan would be much cheaper, but this isn’t always the case in the wake of COVID. Lenders have become incredibly skittish, and a private lender who was happy to provide construction loans at LVRs up to 80 percent in the past was now balking at anything over 60 percent. And fees were going up, too.
With some projects, it actually works out that raising from investors costs the same as going to a lender for a construction loan. In these instances, the financials for the project are the same, all that changes is who receives the interest payments: our investors as opposed to a lender. And if we have to pay someone, we would rather it be our clients, instead of a bank.
Keeping costs down ensures we can continue to achieve high returns for our investors, which is our ultimate goal.
If you would like to know more about our investment opportunities, be sure to download our info pack so you can make an informed decision.