An increasing number of projects in the specialised property asset sector are attracting attention as the world emerges from the pandemic-induced downturn of 2020.
However, as the diversity of opportunities for developers and investors continues to widen, funding – a crucial part of the process – remains less than straightforward.
In the residential sphere, such assets include build-to-rent, social housing, disability related housing, boarding houses and over-55s accommodation. While specialised commercial projects include childcare, student accommodation, fuel stations and caravan parks.
TierONE Capital’s head of investment services, Chris Broad, says the reason for the growing interest in these opportunities from developers is simple.
“It’s about following the money. Everyone wants to find an opportunity with potential. They’re looking at trends and identifying those opportunities.
“For example, over-55s in many parts of the country want to downsize but they are not finding options to suit them. They’re not interested in the traditional retirement home offering.
“Meeting that need has the potential to be hugely successful.”
Broad said the cost of land, particularly in Sydney, was also a factor for developers looking outside the box.
“The actual cost of a site before development is often so high these days that to turn a profit is increasingly difficult without a high number of dwellings in the yield,” he said.
“The same site could be used for an over-55s, build-to-rent or boarding accommodation development where there is strong market demand and certainty about selling the end product but funding the project requires more effort.”
Obtaining funding for such assets from traditional bank lenders, who, by and large, prefer to deal with standard completed assets, can be challenging.
The nuances of these specialised property assets don’t always easily fit the banks’ criteria.
The approach to such assets from non-bank lenders, such as TierONE Capital, is less dictated by rigid frameworks and more about looking at each project on its individual merits.
The value non-bank lenders can provide is primarily led by their flexibility towards pre-sale and pre-lease requirements.
Generally, banks require a level of pre-commitment prior to advancing funds for construction. The time it takes for a developer to secure these pre-commitments adds holding costs to the project and often also creates issues in locking in building contracts.
Non-bank lenders are more open to progressive equity contributions as a mitigant to the lack of pre-commitments, which will assist the developer to start the project and run the marketing/sales campaign in parallel, thus reducing overall project costs.
Non-bank lenders can provide early stage funding in addition to end-to-end pre-development and construction funding. This gives the developer certainty with regards to both funding and timelines.
Typically, from TierONE Capital’s perspective, if the site is well located, the developer has a proven track record and they have engaged a quality builder and management team, then it makes sense to fund.
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