Property Development – Changing the Funding Model
The Australian property market is a potential ticking time-bomb with residential investors increasingly focused on the capital appreciation for returns, while commercial property transactions have actively pursued yield based investments over the past 12-18 months. The property market looks booyed by large interest from offshore investment and local cashed-up investors and developers. The short to medium term outlook for interest rates appears to be positive, but long term there is an expectation of rising rates – tightening interest rates from banks are coming into play and access to development finance is not as rosy as it once was.
The restrictions on institutional lending will become a growing issue as the major banks need to reduce exposure to property leading and markets. The market is also adjusting to tightening on foreign buyers and global policy changes happening around the movement of capital outflows such as China. According to Knight Frank Chinese-backed developer's bought 38% of Australian residential development sites in 2016.
Developers / Builders – The Challenge
Developers appreciate there are still significant opportunity in the market but the challenge now sets in access capital and potentially looking at non-bank capital sources. Key aspects will be to consider development design, building services and fabric costs. Stripping back development costs to these numbers can demonstrate opportunity to extend funding budget and potentially look at specialist funding sources.
The cost of funding may rise on the debt side, but if investor equity is costly, the increase LVRs available with private funders may provide net decreases in the overall cost of capital. The ability to access this funding without pre-sale quotas make it a desirable option for smaller developers.
Typically buildings are being designed and built to minimum code removing the costs of all the bells and whistles to maximize builder and developer profit. Less consideration and emphasis is placed on the new development of ongoing operation and liabilities.
The New Model
What if we could put in all these additional extras to create a better performing asset with lower operational costs, but not have to increase the capital budget – in-fact decrease our capital cost by accessing Green Structured Finance (GSF), long-term funding available, subsidized by specialist product funding. This new loan / debt will be serviced by the operational savings made by the improved technology and products.
As an example, a developer is building and owning a mixed use site for $ 50m. We consider the design and energy consuming technologies for the site (ie lighting, solar, metering / embedded network, thermal insulation, glazing performance, energy efficient white-goods, hot water, HVAC).
SFG assess the ongoing lifecycle cost of these technologies. We then create a package outlining which products have an attractive return on investment based off the predicted energy costs. For this example $ 5m is taken out of the capital cost of the project for the improved package. This will reduce the developers Capex and Opex, improving cashflow and returning profit. This reduction of $ 5M or 10% is able to used on other projects or contribute to improving the project LVR and financial make-up.