Property Development Model Is Challenging The Big End of Town

Property Development Model Is Challenging The Big End of Town

 The Australian property market is a potential ticking time-bomb with residential investors increasingly focused on capital appreciation for returns. In contrast, commercial property transactions have actively pursued yield based investments over the past 12-18 months. The property market seems buoyed by significant interest from offshore investment and local cashed-up investors and developers. The short to medium-term outlook for interest rates appears to be positive, but longer-term, there is an expectation of rising rates - tightening interest rates from banks are coming into play, and access to development finance isn't as rosy as it once was.

The restrictions on institutional lending will become a growing issue as the major banks need to reduce exposure to property leading and markets. The market is also adjusting to tightening on foreign buyers and global policy changes happening around the movement of capital outflows such as China. According to Knight Frank, Chinese-backed developer's bought 38% of Australian residential development sites in 2016.

Developers/Builders - The Challenge

Developers appreciate there is still significant opportunity in the market, but the challenge now sits in accessing capital and potentially looking at non-bank capital sources. Key aspects will be to consider development design, building services, and fabric costs. Stripping back development costs to these numbers can demonstrate an opportunity to extend the funding budget and potentially look at specialist funding sources.

The cost of funding might rise on the debit side. Still, if investor equity is costly, the increased LVRs available with private funders might provide net decreases in the overall cost of capital. The ability to access this funding without pre-sale quotas make it a desirable option for smaller developers.

Typically, buildings are designed and built to minimum code, removing the costs of all the bells and whistles to maximize builder & developer profit. Less consideration and emphasis is placed on the new development's ongoing operation and liabilities.

The New Model

What if we could put all these additional extras to create a better performing asset with lower operational costs, but not have to increase the capital budget - in-fact, decrease our capital cost by accessing Green Structured Finance (GSF), long-term funding available, subsidized by specialist product funding. This new loan/debt will be serviced by the operational savings made by the improved technology and products.


As an example, a developer is building and owning a mixed-use site for $50m. We consider the design and energy consuming technologies for the site (i.e., lighting, solar, metering/embedded network, thermal insulation, glazing performance, energy efficient white-goods, hot water, HVAC).

SFG assesses the ongoing lifecycle cost of these technologies. We then create a package outlining which products have an attractive return on investment based on the predicted energy costs. For this example, $5m is taken out of the project's capital cost for the improved package. This will reduce the developer's Capex and Opex, improving cashflow and returning profit. This reduction of $5M or 10% can be used on other projects or contribute to improving the project LVR and financial make-up.

Green Structured Finance from Sustainable Future Group is a new approach to a tightening development financing market, designed to optimize financial and development performance. We specialize in pulling together projects crossing the boundaries of Financial, Design, Advice, and Delivery. Contact us to see how we can help improve your development.

Construction

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