While good and knowledgeable service will help you win business, you still need to have a competitive product.
Remaining consistently competitive has kept GPS in business for over 27 years, financing residential development projects in South East Queensland.
In GPS’s earlier years, we worked on the “three-month rule”. I was informed by a well-regarded, multiple repeat borrower that if funding through GPS could take three months off the project, then we were competitive.
The Competition
GPS’s major competitors in the residential development loan market are the Banks. The number of direct, referred and repeat borrowers we attract demonstrates that we are competitive with the other non-banks.
The extent to which GPS is competitive with the banks largely depends on their appetite. They clearly have the balance sheet to win as much business as they want. I have always been cognizant that when it comes to the residential development lending market, GPS is but the flea on the tail of the dog. If the dog (banks) wags its tail, all GPS can do is hold on.
It was good times for GPS when APRA regulation effectively stopped the banks from lending in our market.
While the banks presently have an appetite, it is quite subdued. With a requirement for around 80% debt coverage from pre-sales, they have a reduced level of complying projects.
Within South East Queensland there remains areas where achieving 80% debt coverage is not possible due to the conservative nature of their residents. They want to be able to “touch and feel”, or at least see construction commence, before they will put down a 10% deposit and enter an unconditional contract.
It’s About More than Interest Rate
The big draw card for the banks is interest rate. In the current market GPS is at 6.95%, while the banks may be 3% cheaper.
Working off this basis and a requirement of 80% debt coverage from pre-sales, I have formulated the 2.25% rule to determine if GPS is competitive.
2.25% of loan amount is roughly the overall differential in the cost of interest. Why 2.25% and not 3%? You only pay interest on the drawn amount, and not many of the projects GPS funds are completed in 12 months.
I note that each project is different, and my rule is nothing more than a rule of thumb. This 2.25% of loan amount can be made up in several ways:
Cost of sales –
Using marketing channels for pre-construction investor sales comes at a significant cost. Commissions can rise from around 3% to a staggering 10%.
Escalation of build price –
Pre-sales take time to achieve. In that time, there will inevitably be an escalation of the build price.
Uplift in sale prices –
Pre-sales lock in sale prices. You don’t need much uplift to get to 2.25% of the loan amount.
Consistently Competitive
By funding through GPS, you can easily make up the additional cost of interest in one of these ways. The others become profit.
There are many other reasons to fund your project through GPS, higher LVRs (less equity required), direct access to the decision makers, service levels, commitment to completion of construction, long history of prompt payment of progress draws and niche industry knowledge.
Taking the first step to securing your finance with GPS is as easy as giving us a call, or emailing – lending@gpsinvest.com.au.
Richard Woodhead | Managing Director – 0427 574 246
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