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The Financial Strategy Easing Cash Flow Pressure for Developers
Cost of living, construction costs and contribution costs have all climbed, and the entire cost base for completing a property development has increased sharply over the past few years.
Interest rates look likely to rise further still.
Developers are seeing margins tighten from every direction. Many are asking if there is a way to hold onto more cash while still getting projects across the line, using someone else’s money to make money rather than tying up their own.
According to Private Lending Brokers, the answer is private lending, a solution that allows developers to carry higher debt levels and rely on less of their own cash to complete a project.
Private lending benefits for developers
Private lending sits outside the banking market, with one company lending to another rather than to an individual, and it has grown into a substantial channel.
Private Lending Brokers said the sector’s lighter regulatory footprint, limited mainly to ASIC and APRA requirements, keeps it nimble and efficient compared with traditional bank lending.
For developers, the appeal comes down to three things. Leverage tends to run higher, often up to 75 per cent LVR for settlements, construction or residual stock.
Presales are not required, with private lenders generally willing to fund the sale of completed product at the end of a project.
And settlement can move quickly, in some cases within four weeks.
Why does higher leverage matter?
There are several reasons more debt can work in a developer’s favour, particularly as costs rise across the board.
Cash retention is the most immediate: carrying more debt allows a developer to hold onto more of their own cash rather than deploying it into a project.
Project returns can also improve, because increasing the proportion of comparatively cheap debt against more expensive cash equity lowers a project’s weighted average cost of capital (WACC).
Cash itself carries a real cost, and it is worth considering how difficult it is to generate and how long it takes to recover.
A development cycle typically runs five years from site purchase through construction to selldown, meaning five years pass before a return is realised and cash balances are replenished.
Held against that timeframe, cash is a valuable and finite resource.
Does the premium outweigh the reward?
Private debt does come at a premium. Private Lending Brokers put the gap at one to three per cent above bank rates, though it noted that spread is narrowing as interest rates rise.
Any comparison, the firm argued, needs to weigh that premium against the real cost of bank finance, including the need to inject more expensive cash and the discounting often required to sell off the plan to satisfy bank presale conditions.
Weighed against those costs, Private Lending Brokers argued that private lending’s higher headline rate does not necessarily make it the more expensive option once the full picture is considered.
The firm pointed to listed property trusts now using private lending debt as an indicator that higher leverage from private lenders has become a genuine preference for developers looking to protect their cash position.
So, is private lending offering higher debt really that much more expensive than the bank or is it the smarter way to develop?
The latter. It’s a smarter way to develop and given even listed property trusts are using private lending debt that’s a clear indicator that higher debt from a private lender is now a preference for developers to hold onto their valuable cash.
The Urban Developer is proud to partner with Private Lending Brokers to deliver this article to you. In doing so, we can continue to publish our daily news, information, insights and opinion to you, our valued readers.
