Robert Herrick was ahead of his time. In the poem below he’s effectively telling you to seize the day. I’m sure Mr Herrick didn’t have property developers in mind when he wrote the poem (in fact, the word Virgin in the title of the poem kind of gives away whom he had in mind) but the sentiment applies across all lending markets.
Gather ye rosebuds while ye may,
Old Time is still a-flying;
And this same flower that smiles today
Tomorrow will be dying.
– Robert Herrick, 1648, published as a poem “To the Virgins, To Make Much of Time”
The reason I say this is because, lately, we’ve had many an enquiry from property developers many of whom still believe their bankers will lend them funds to complete the project they began (say a year ago) but has been held up in various stages of approval since.
When we talk to some of these developers, it’s very difficult to convey the following message that is the minimum required by the banks prior to considering a loan:
- You must have prior development experience. This is the most important criteria for the banks.
- You must have equity in the project (ie, you’re risking your own money)
- If the size of the project warrants it, you must appoint a builder and Quantity Surveyor that are acceptable to the bank.
- You must pre-sell around 120% of the debt amount. So if you’re borrowing $10M, you have to pre-sell $12M before approaching the bank.
- The bank has to approve to whom you pre-sell your properties – so try not to sell them all to investors from China.
There are other restrictions but even if you’ve managed to meet all of the above, three of the four major banks are currently not looking at any property risk (and we expect the final one to cave in shortly).
Developers usually think that they’re different. Their bank will lend them the funds. They will be an exception to the banks’ current policies. Good luck with all of that.
So, where does that leave you?
If you’ve been rejected by all of the banks that you’ve approached because they have no risk appetite, there are plenty of other lenders that will lend to you. But if you’re expecting a price similar to that offered by the banks (when they were lending), you should sell or mothball your development now.
So what price can you expect? Well, it depends on how many of the above 5 conditions you tick. The better your risk profile the lower the price. A perfect deal will be done at around 8% plus fees (say around 2%). Typically, however, most lending in this sector will be done at 10-16%.
So if you’re well advanced on your development project and are finding that banks don’t want to talk to you, you’re not alone.
Right now, there’s an avenue of funding available to you. How long it lasts, no-one can predict.
But getting back to the poem Mr Herrick tells you to Gather ye rose buds (basically go after whatever it is you want) and the most important three words that follow “…while ye may”. In other words, while you can. Time’s a ticking.
We’re more than happy to chat with you if you find yourself in this predicament.