When Banks say jump, you say how high?

Development Finance is becoming increasingly difficult during the current credit squeeze. Its not so much a financial crisis in Australia, its more a credit squeeze of the availability of money for higher risk projects, particularly property development.

Over the past 6 to 12 months, I have noticed more and more development finance lenders leaving the industry, or closing their doors to new business. In Australia we are now faced with a limited supply of money for new projects, and the remaining lenders have raised the bar.

How high is the bar set?
Today, the loan approval condition of "presales" is standard. Most ask for at least 50% presales, depending on the nature of the property deal, and the risk associated with repaying the loan.
Some are asking for 100% presales to basically take out any sales risk.

Also, most lenders require you to have experience in the property development industry. They are sick of seeing new entrants unsuccessfully develop property in Australia, and they now want runs on the board. An alternative is to buy the expertise i.e. hire project managers like Plan Assist http://www.planassist.com.au/)

Then there is the need to use a reputable and experienced builder. In the past 3 months, I personally know of 4 builders that have gone bust, some with 40 year reputations.

If you don't have the experience and you don't have pre-sales, you just won't see the banks finance your development project.

For those already in the industry, lets face it, if you are a developer out there finishing your project right now, you have experienced some delay or price reduction in your stock. At least the interest rates have dropped by 3% to 4% and are much lower than a year ago, and rental yields have been raised. In some cases, its worth keeping the property as a rental property rather than selling (although watch out with having to pay back GST input tax credits if you rent it out - make sure you see a good accountant for advice if you go down this path).

The emphasis for seeking expertise and good advice is so important right now.
A banker commented to me last week that most of their property development clients are experiencing around 20% reduction in sales prices. It makes you realise where we are in the property cycle in Australia, and what large effect the current credit squeeze has had on sales activity, developer profits and property prices.