Typical Residual Stock Facilities Available
Home Loan Style Residual Stock Facilities:
These facilities are best suited when the developer intends to withdraw some equity from the project and reinvest the equity in another project. These loans have a period of greater than 24 months and a Cost of Funds of around the 5% p.a. mark.
Bridging Loan Style Residual Stock Facilities:
These facilities are best suited to assist the developer in an orderly sell down of the remaining stock. Typically these facilities will have a term between 3 and 12 months and a Cost of Funds at around the 9% p.a. to 12% p.a. mark. Some added advantages here might include that the lender will not take 100% of net proceeds from every settlement.
Implications from Apartment Sales Slowdown
The impact from this slowdown in sales rates is that we are starting to see many projects with surplus unsold by completion and this is creating certain complications for the developers of those projects given that:
- Most projects carry a significant portion of Construction Debt funding, which by definition is required to be repaid on completion of the project. So, in these cases if the developer does not have sufficient sales to repay the Construction Debt at completion, they must refinance the balance; and
- Even if there are sufficient sales to repay the Construction Debt at completion, the developer might want to raise funds against their equity in the remaining stock in order to reinvest that equity into their next project.
For these reasons, we are seeing an increase in enquiries for residual stock facilities.
Options for Residual Stock Facilities
Depending on the Developer’s strategy there are various options available in the market for residual stock facilities. As a rule of thumb, the term and gearing of the facility are directly related to the cost of the facility i.e. a 20-year home loan style loan is typically much cheaper than a 6-month bridging loan.
Common success strategies BEDROCK Funding can secure include:
1. Arranging a Residual Stock Facility:
The developer intends to retain the residual stock for a long-term investment period (> 5 years). Reasons for this might include, no GST liability, no sales commissions on those units etc.Effectively under these circumstances we can arrange a residual stock facility at a relatively low cost of funds, say <5% p.a. at a Loan to Value Ration (LVR) of between 60% and 70% enabling the developer to access their equity currently locked up in the project to reinvest into their next project.
2. Arranging 6 – 9 Months Bridging Facilities:
The second scenario sees the developer wanting to progressively sell down the residual stock, but in an orderly fashion. This will ensure they are not rushed by a construction lender needing to be repaid and enables them to maintain and potentially improve the capital value of the stock.
In these cases, we can arrange 6 – 9 months bridging facilities, which will provide the developer with sufficient time to undertake an orderly sell down.
Bridging loans are more expensive due to the shorter period and are typically priced at an interest rate between 8% p.a. and 12% p.a. at a 70% LVR.
Advantages here are that there are no early payout penalties and the facility allows the developer to retain some of the proceeds from each sale rather than waiting until the lender is fully repaid as these bridging loan lenders do not require full net proceeds when settling the units provided their exposure is progressively improving.
There are of course many variations on these two basic strategies, so the best course of action would be to let us have a look at your individual requirements and assess how we can structure a custom solution to satisfy your individual project needs.