It never ceases to amaze me how some borrowers are so fixated on interest rate, that they are blind to the real cost of construction finance.
When looking at the cost of finance, you should look at more than the interest rate, application fee and line fees. You need to include the other costs hiding behind the cheap interest rate.
Particularly, the cost of achieving pre-construction sales.
The higher marketing costs, the interest on upfront fees and holding costs while achieving the sales, along with the cost of additional equity, should also be factored into the cost of finance. They add up.
Lenders like GPS charge a higher interest rate than the banks, but we generally lend with no pre-construction sale requirements and a higher LVR.
Traditionally, I have priced the GPS product on the three month rule. If we take three months off the life of the project by reducing pre-sales, along with providing better service and more reliable progress payments etc., then we are competitive on an all-inclusive cost basis.
Read my article here on The Three Month Rule.
In the current market the banks, if lending at all, require 100% plus debt coverage from pre-construction sales. They need this as a risk mitigant, to reduce their beloved cost of capital.
On the other side, the sales market has turned, which has made pre-construction sales either very expensive or, more commonly, impossible to achieve. Pre-construction sales can also prejudice the Gross Realisable Values as valuers discount marketing fees. Such sales can also be “buying” settlement risk.
Lenders like GPS have a cap on how much lending we will do each year. It amounts to a drop in the ocean compared with bank lending (when they are actually lending for residential construction).
Residential development is a numbers game. It is about the actual amount of end profit and the risks associated with achieving that figure. GPS factors in all costs when putting together a loan and can deliver a flexible deal that works for the individual developer.
Richard Woodhead – Managing Director
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