Property Developer Finance

Understanding Development Finance

Property development finance is fundamentally different from standard commercial lending. Traditional lenders assess businesses on historical performance – last year's profit and loss, balance sheet strength, and proven track records. Development finance flips this entirely: lenders are funding a future outcome based on projected feasibility, construction timelines, and end values that don't yet exist.

Banks use sophisticated property development models to stress-test your project before approving funding. They're calculating your Return on Cost, testing sensitivity scenarios, and ensuring the numbers still work if sales slow or costs increase. The fundamental question is: "Will this project complete on time, on budget, and generate sufficient margin to absorb market movements?"

Understanding how lenders actually assess deals – not just what documents they request – is where experienced guidance makes the difference between approval and decline.

Work-in-Progress (WIP) Schedules

Unlike traditional lending where historical financials drive decisions, development lenders focus primarily on your Work-in-Progress schedule. This document tracks every cost element from land acquisition through to completion, showing when money is spent and how value is created at each stage.

Your WIP should include land costs, stamp duty, legal fees, planning and permit costs, construction costs broken down by stage, professional fees (architect, engineer, surveyor), interest costs, contingency allowances, selling costs, and GST treatment.

Pre-Sales: What Actually Counts

Pre-sales demonstrate market acceptance and reduce lender risk – but not all pre-sales are treated equally. Lenders distinguish between "qualifying" and "non-qualifying" pre-sales, and the composition of your sales book matters as much as the total value.

Factors that strengthen your pre-sale position:

• Unconditional contracts with no finance clauses or termination rights
• Substantial deposits (typically 10%+, aligned with local market norms)
• Local owner-occupier purchasers over investors
• Arm's length transactions with no rebates or unusual incentives
• Sunset dates with acceptable buffer from forecast completion (typically minimum 12 months)
• Foreign purchaser (FIRB) exposure typically capped at 20% of total sales

Contracts with finance clauses, minimal deposits, or subject-to-sale conditions may receive discounted treatment or not count at all. The sales rate achieved, pricing compared to valuer assessments, and whether contracts can realistically settle are all scrutinised.

Developer Margin & Return on Cost

Return on Cost (ROC) is how lenders measure whether your development is commercially viable. It's calculated as net profit divided by total development costs. Most lenders look for a minimum ROC of 20% regardless of market conditions – this provides buffer for cost overruns, sale discounts, or market movements.

When markets are overheated and ROC compresses below 15%, lenders become cautious. As markets cool and ROC expectations increase, lending appetite actually improves for well-structured deals. A healthy ROC demonstrates that even if things don't go perfectly, there's enough margin to protect everyone's position.

Cash Equity – Your Skin in the Game

Expect to contribute a minimum of 20% cash equity. This isn't just about having "skin in the game" – lenders want evidence you have the financial capacity to fund the equity requirement AND have liquidity remaining to cover unforeseen cost overruns without coming back to them.

Initial due diligence focuses on proving you can meet the equity requirement and still maintain adequate reserves. The source and nature of your equity is scrutinised: is it true equity or shareholder loans? Can you inject more if required? Is it encumbered elsewhere?

For sites held less than two years, most lenders use your purchase price rather than current market value when calculating equity. Valuation uplift is typically only recognised where you've added genuine value through development approval or rezoning – simply holding land through a rising market doesn't automatically increase your borrowing capacity.

Private Lenders & Alternative Funding

One of the biggest misconceptions about development finance is that you need strong personal income to qualify. Unlike home loans where serviceability is paramount, development finance is fundamentally assessed on the project itself – the feasibility, the exit strategy, and the security position.

We work with private lenders and specialist funders who take a purely commercial view. If your project stacks up – solid margins, realistic end values, appropriate equity, and a clear path to completion – funding options exist regardless of your personal income position.

Builder & Delivery Risk – Currently the Biggest Concern

In the current environment, delivery risk is the greatest concern for lenders. The building industry has experienced severe supply chain disruptions leading to increased material costs, labour shortages, and delayed progress on multiple developments. Legacy fixed-price contracts that are now unprofitable are putting builders under cashflow pressure – even reputable ones.

Current pressure points include higher interest rates, labour shortages, and building contracts that were priced before cost escalations. All of these contribute to eroding profit margins and, in worst cases, making developments unviable. Lenders are assessing whether your builder can actually deliver given these pressures.

Your builder's financial position is assessed alongside their technical capability. Lenders look at current work-in-progress loads, cashflow capacity to carry costs between progress claims, and whether they can absorb unexpected delays. A builder stretched across too many projects – even a reputable one – may raise concerns.

For larger projects, expect your builder and building contract to be reviewed by construction risk specialists before funding is confirmed. They're assessing contractor capability, contract structure, insurance adequacy, and whether the fixed price genuinely transfers risk.

Interest Capitalisation & Facility Structuring

Development loans typically allow interest capitalisation – meaning interest accrues and is added to the loan balance rather than requiring monthly payments. Your facility limit must include projected interest costs through to completion, plus buffer for potential delays.

The way your facility is structured affects both cost and flexibility. Staged drawdown facilities, GST facilities, cost overrun provisions, and extension options all need consideration upfront. Understanding how different lenders structure their facilities – and the implications for your project – can save significant cost and stress.

Valuations & How Lenders Use Them

Lenders commission independent valuations, but they don't simply accept your projected end values at face value. The valuer's feasibility inputs – construction costs, sales rates, and achievable pricing – are stress-tested against the lender's own assessment and your builder's contract.

For land transactions, the valuation methodology matters significantly. "As Is" valuations reflect current market value, while residual or hypothetical development valuations factor in future development potential. Which methodology applies – and when lenders will accept uplift from one to the other – has real implications for your borrowing capacity.

Quantity Surveyor (QS) Role

Quantity Surveyors play a crucial role in development finance. Lenders appoint a QS to verify construction costs in your feasibility, monitor progress, and certify claims before each draw. The QS is essentially the lender's eyes on site.

Before approval, the QS reviews your construction budget against the building contract to verify costs are realistic. During construction, they inspect and certify work completed before funds are released. This typically takes 5-10 business days per claim – factor this into cash flow planning as your builder will need to carry costs between payments.

Exit Strategy & What Lenders Really Care About

Every development deal needs a clear, credible exit. Lenders analyse your primary exit (sales, refinance, or hold) and want comfort that a secondary exit exists if plan A doesn't work. Can you hold and rent if sales slow? Is there equity or guarantor capacity to inject if needed? Could the asset refinance to another lender?

For subdivision projects, exit is typically through staged lot settlements – lenders model your sales rate against delivery timeline and assess whether debt can be repaid progressively. For construction projects, they're looking at realistic settlement timeframes and what happens if purchasers don't settle.

What Can Go Wrong – And Why Lenders Care

Understanding what keeps credit assessors awake at night helps you present applications that address concerns before they're raised. Common risks that can derail developments include:

• Unexpected construction delays – builder cashflow issues, labour shortages, materials supply problems, or prolonged wet weather
• Cost blowouts – inadequate contingency, rock/difficult ground conditions, additional retaining walls, drainage infrastructure requirements
• Topography and site issues – undulating land, boundary disputes, access rights, or discovering issues during construction
• Council and infrastructure delays – responsible authority requirements for additional works, road intersections, compliance stage approvals
• Pre-sale fallover – purchasers failing to settle, sunset clause expiry, or finance clauses not being satisfied
• Declining demand – oversupply in the area reducing sales rates and potentially requiring price reductions
• Interest rate pressure – higher holding costs eating into margins, and purchasers unable to obtain finance at settlement
• For subdivisions: staging complexity – initial stages often have higher infrastructure costs, and multi-stage projects see diminishing land value as stages complete