Expert spotlight on finance: funding difficult, expensive and frustrating for smaller developers? The key to a breakthrough is…

As another wave of widespread interest in property development gathers pace and the Medium Density Residential Standards become law, demand for loan finance among small and medium-sized developers continues to grow. Securing sufficient funding is one of the earliest and most difficult steps in the entire development and construction process, and one where experience matters most.

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How can smaller developers overcome the difficulty, expense and frustration of financing that constrain their growth? Here is what finance expert and former government investment official Vicky Xi has to say:

 

About Vicky

Vicky Xi, a financing partner at Squirrel Group, has nearly ten years of experience in New Zealand banking and previously served as the New Zealand Government’s director of cross-border investment for Greater China.(Click to read ‘Finance feels like unfamiliar territory? Fear not! A former New Zealand government investment official helps your financing take flight!’)

With extensive experience in New Zealand’s financial system and a thorough understanding of the financing and lending rules used by major commercial banks’ property departments and finance companies, Vicky has particular expertise in development-related lending, including land purchase, development and construction loans. YIJU has teamed up with Vicky to launch the ‘Expert spotlight on finance’ column. Through in-depth analysis of representative cases, it aims to share the financing insights she has distilled from years of practical experience, helping YIJU readers apply those lessons to other situations.

 

Case study

Mr B is a relatively conservative, experienced developer who is also a builder. His main business is developing medium-density housing and standalone homes in new subdivisions. Like many developers who have grown by reinvesting and building on earlier gains, Mr B relies primarily on company profits and mortgages from mainstream banks.

In this case, Mr B’s company was progressing several projects at different locations simultaneously, including the development and construction of more than 30 units in the central suburbs. With payments from another concurrent project delayed, Mr B needed to raise NZ$2,000,000 at short notice to cover construction payments and bridge the cash flow gap.

Mr B’s bank manager said he had reached his borrowing limit and could not borrow any more. Mr B had also considered selling an investment property at a low price to meet the urgent need, but with house prices continuing to rise, he was reluctant to do so and hoped for a better solution.

 

Expert advice

Bank finance has the lowest financing costs among property development funding options. However, banks set demanding requirements for developers’ credentials and projects: borrowers need an excellent track record of managing and delivering developments to have a chance of securing a loan. Banks also require borrowers to meet certain presales conditions. They generally release funds on a Cost to Complete basis, meaning developers must first provide the upfront funding—the difference between total costs and the loan amount. Each drawdown must also be supported by a valuer’s report and/or a quantity surveyor’s (QS) report.

Finance companies charge relatively higher interest than banks but have more relaxed development lending requirements. They focus more on the project’s prospects and the value of the security, with less stringent requirements for the applicant’s development experience and background. Their lending criteria are more flexible, and most have no presales requirements, leaving developers to decide when to sell. Most finance companies can lend separately against land and construction, so borrowing can begin at the land purchase stage. Construction loan drawdowns are also more flexible, with most requiring only council inspection sign-offs. Most finance companies do not require a QS for small and medium-sized developments.

Vicky points out that many developers do not understand the differences between banks and finance companies, focusing only on comparing interest rates. In fact, the differences are substantial, and each has advantages and disadvantages. Every project needs a tailored approach to find the most suitable solution:

Through detailed discussions with Mr B, Vicky discovered that his business had not only reached its cash flow borrowing limit, but his projects also failed to meet the basic requirements for bank development loans. None had presales or quantity surveyor’s cost reports, both of which banks require for development lending. Securing bank finance against his projects was therefore almost impossible.

With no presales or QS reports available, Vicky analysed the best funding arrangement for Mr B and chose a small, low-interest Squirrel Money construction loan. Funds were released quickly, resolving his urgent need.

 

Tip: Squirrel Money small, low-interest construction loans

Product advantages:

• Very low interest: floating rates from 5.95% p.a.
• Flexible repayment: no early repayment penalties
• Simple requirements: no presales or QS requirements
• Fast responses: every enquiry receives a reply and every matter is followed through. Stability: a local business with 13 years of experience, offering a patient, trustworthy partnership.

Suitable for:

• Developers seeking to settle on land for future development at minimal cost and hold it for a short period
• Joint venture development partners who want to preserve their individual bank borrowing capacity
• Small and medium-sized developments with most project funding already secured, a small funding shortfall of less than NZ$2,000,000, and a need for fast access to funds

Explaining why she could make a different lending decision from a bank, Vicky says banks rely on QS reports because their decision-making systems are more complex and require reports and recommendations from other professionals to assess risk. By contrast, Vicky and the Squirrel financing team she leads are themselves finance and property experts. They have their own assessment criteria and can evaluate Mr B’s projects against current market conditions without relying entirely on assessment reports. That expertise also allows for more flexible lending terms and faster decisions.