Financing Your Development: A Strategic Guide for Perth Property Owners
Planning a property development in Perth’s northern suburbs is an exciting way to build wealth, but the transition from landowner to developer requires a shift in how you view property.
While a standard home loan is about your personal income, development finance is entirely about the project’s potential. To a lender, your project is a business. Before signing a construction contract or clearing a site in Wanneroo or Joondalup, you need to understand what property finance is and how banks view your project’s “exit strategy”, which is where we come in.
What is Property Development Finance?
Unlike a traditional mortgage that provides a lump sum, development finance is a short-term facility (usually 6–36 months) designed to cover the costs of building multiple dwellings.
The most important distinction for developers to understand is the staged drawdown. Funds are released progressively as construction milestones are met (e.g., acquisition, slab down, lock-up). This ensures the project remains viable and the value of the land increases in line with the debt.
The Role of the Sales Appraisal in Funding
Lenders don’t just look at the cost of building; they also consider what the finished product will sell for. This is known as the Gross Realisation Value (GRV).
In Australia, lenders typically provide 70–80% of the project costs, but they often cap this based on a percentage of the GRV. This is why a professional sales appraisal is the first step in your finance journey. Without an accurate, evidence-based valuation of what those villas or townhouses will fetch in the current Perth market, a lender cannot verify your profit margins.
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Key Components Lenders Assess
Lenders conduct a thorough stress test on your project. They want to see:
- Profit on Cost: Most lenders look for a minimum margin of 15–20%.
- Presales: For larger projects, you may need to sell a percentage of the units “off-the-plan” before the bank will trigger the construction loan.
- Developer Experience: If this is your first duplex or triplex, lenders will look closely at your choice of builder and your project management team.
- Market Demand: Is there a hunger for 3×2 villas in your specific suburb? This is where local market knowledge becomes your greatest asset during the application process.
How Development Finance is Structured
Most projects are funded through a capital stack:
- Equity: Your cash or the value of the land you already own.
- Senior Debt: The primary loan covering the bulk of the construction.
- Mezzanine Finance: Secondary funding used to fill the gap if equity is low (usually at a higher interest rate).
You can also explore specific strategies, like how to finance a commercial property with no money down if your development includes a mixed-use component.
The Roadmap to Approval
To secure the best rates and terms, you need a professional “Developer’s Pack” that includes:
- A Detailed Feasibility Study: Showing all costs vs. expected sales revenue.
- Council Approvals: DA (Development Approval) is usually required before finance is finalised.
- Fixed-Price Building Contract: To protect against the rising costs of materials.
- A Solid Exit Strategy: Are you selling all units, or “selling one to keep one”? If you plan to keep a unit, you will also need to request a rental appraisal to satisfy the lender’s requirements for long-term debt servicing.
Start with the End in Mind
At Listed Estate Agents, we see many developers focus so heavily on the cost of the build that they lose sight of the market they are building for. Successful development is about building what buyers actually want.
Before you head to a broker or the bank, you need to know exactly what your finished project is worth in today’s market. We provide expert sales appraisals for developments across Perth’s northern suburbs, helping you present a bank-ready case for your next project.
Ready to see if your development stacks up?
Contact our team today for a professional appraisal, and let’s discuss the best strategy for your site.
