In Queensland’s construction industry, presales have historically been the go-to means for securing development financing. Traditionally, presales offer lenders a form of financial protection, affirming market acceptance for the product being developed and offering a safety net for lenders in a worst-case scenario.
However, in today’s dynamic market, presales can significantly limit profit potential. While they may offer security, they can lock developers into contracts that may not reflect the product’s final market value, leading to profit loss when the project is completed.
This where is the value of private lenders can come in. Unlike traditional banks, private lenders often do not require presales, recognising that property values can rise significantly during construction and that other effecting parameters can also change.
The Costs of Presales
Presales may provide initial financial security, but they come with hidden costs that can outweigh their benefits. In South East Queensland, where property prices are soaring, the true cost of presales isn’t just in the upfront marketing and sales commissions but also in the opportunity cost of locking in prices early. Developers who commit to presales are essentially capping their potential profits by selling units at prices that might not reflect the market’s value at project completion.
When considering presales, developers also need to weigh up the less visible sunken costs involved;
Marketing
Marketing costs for presales can also be substantial. Without physical stock for buyers to view, developers often spend more on marketing to attract a broad audience rather than targeting the most ideal buyer who would pay a premium for a completed product. This can lead to wasted efforts and resources.
Prepaid Sale Commission
Additionally, developers may engage specialised Investment Marketing organisations to meet presale targets quickly. These agents, while offering a broader network, charge at a premium (often between 6% – 8%) which adds up to the project’s overall costs. These specialised agents often dip into their extended networks of broad investment buyers, rather than local market buyers, potentially leading to future sales challenges as local owner-occupiers may be hesitant to purchase in a development predominantly filled with renters.
Off-The-Plan Hesitation
Current market conditions further complicate the presale strategy. In Queensland, construction company insolvencies have risen by 30.62% this year alone, and potential buyers are increasingly hesitant towards off-the-plan purchases, wary of committing to projects that may not be completed or could face significant delays and cost increases.
In contrast, projects with completed, or near-completed, stock are likely to attract more confident buyers, including those willing to pay a premium for ready-to-occupy properties. This shift in buyer behavior underscores the importance of flexible finance and marketing strategies that don’t rely on presales.
Opportunity
The most significant hidden cost of presales, however, is the opportunity cost. Presales can delay construction starts as developers wait to hit lender-specified presale targets. This delay can lead to increased construction and labor costs, missed project milestones, and wasted time and money paid to external parties like real estate agents. This time lost is something that cannot be bought back, and can erode the profitability of a project.
Developers who instead bypass the presale cycle can adjust their pricing strategy based on real-time market conditions and real-time construction cost increases, ensuring they capture the future value of their developments. This approach not only assures profitability, but also provides a competitive edge in a market where timing and effective marketing campaigns are critical.
Real-world example: A GPS Funded Project in North Brisbane
We have seen the benefits of avoiding presales firsthand. Only recently, a borrower approached GPS for a project in Brisbane’s northern-suburbs growth corridor, planning to construct the very in-demand product of townhouses. Recognising the positive potential of this project, the loan began with the developers original plan to market only after civil works were complete, about 6 months prior to completion.
In lieu of presales, the borrower was able to begin works immediately and ultimately capitalised on a 9.8% increase in property values during the construction phase. The units were sold at prices well above their initial valuation estimates, resulting in higher overall profits. This strategy also saved the developer from unnecessary upfront marketing costs. The developer’s marketing plan focused on targeted advertising and market research rather than a rushed presale push, enabling them to adjust pricing based on real-time market conditions.
Real-world example: A GPS Funded Project in Central Brisbane
On the other end of the spectrum, developers who rely heavily on presales can face significant challenges. One developer experienced prolonged construction delays and contract failures due to the rising construction costs during the presale period. The developer had to reapproach buyers to increase their initial contract prices, a difficult and ultimately unsuccessful process.
After securing a GPS loan without the need for presales, the developer was then able to make sales on their own terms. With a four-year gap between the cancelled contracts and their renewed sales push, the developer capitalised on the market increase, ultimately selling units at nearly 50% higher prices. This allowed the developer to jumpstart construction without delay, maximising their return on investment.
We do often still see developers opting for presales on their own terms, using the opportunity to gauge the local market, ensure their product is well received by buyers, and gain initial feedback on their project. However, in a market as dynamic as South East Queensland, the level of presales required by traditional lenders now often outweighs the benefits by the end of the loan.
By opting for alternative financing solutions that do not require presales, developers can retain greater control over their projects and ultimately achieve higher profits from their final product.
At GPS Development Finance, we understand the disadvantages associated with presales and offer tailored financial solutions with flexibility at our discretion, to help developers maximise their profit in Queensland’s market.
This article was co-written by: GPS Executive Director, Ben O’Hara
Ben is a management executive with over 20 years of specialist experience across a range of boutique and major brand banking and finance institutions. Ben specialises in growing businesses by developing and implementing strategy through analytical exercises, relationship management and vision.
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