NOW IS THE TIME FOR DEVELOPERS TO ASK THEIR FINANCIER
ABOUT PREFENTIAL EQUITY
The RBA’s May interest rate cut of 2%, combined with another expected rate cut at sometime later in 2015, means that now is a perfect time for developers to ask their bank about preferential equity funding.
Originally thought of as an impractical solution for funding developers, banks are now seeing the new opportunities created through preferential equity funding with evidence of a steady return on investment.
Steller, a Melbourne based property development and construction company, is one such developer that has noticed a significant increase in the use of this form of funding.
Managing Director of Steller, Nicholas Smedley, agrees:
“At Steller we found that the beginning of 2015 saw a positive awareness and use of this form of funding.
“Banks are much more open to it, but still on a case-by-case basis.
“The shift in sentiment is encouraging news for the sector, and banks are seeing that property developers are maximising strong returns in their offerings to investors.”
Preferential equity is a combination of debt and equity that gives the lender the option to gain ownership and control of the financed project, should the loan be unable to be paid back.
Advantages of preferential equity include a reduction in cash equity required by the developer, allowing them to take advantage of potential opportunities elsewhere, and the faster access to illiquid equity locked away in property assets.
Caution must be exercised when dealing with preferential equity though, as it is obviously more expensive than regular funding, but when used correctly, it can be incredibly advantageous for developers.
Nicholas Smedley adds:
“For less-established operators, the ability to get solid financial packages from banks is still just as difficult.
“You need to ensure that your project has strong fundamentals; if so, preferential equity is a strategic option that gives developers the ability to act now rather than later.
“With a substantial amount of equity drained from the company due to several projects underway, or about to start, Steller has been able to finance the finishing touches of a Noble Park project with the use of this preferential equity.
"From a developer's perspective it allowed us to access locked equity in order to fund our next project."
About Steller
Uniquely Steller offers a fully integrated property development service – its team builds, constructs, develops and sells. As a result of this integrated model, Steller provides time-efficient project delivery at lower cost because it doesn’t pay margins to third parties. Steller’s developments embody contemporary luxury and innovation and are suited to functional inner city living. Since its establishment in 2006, Steller is fast approaching the $1 billion mark of current projects underway.
Steller’s philosophy goes against the typical inner-city competitors of high-yield, low space apartments. It deliberately offers larger-style apartments providing buyers with generously spaced, high-quality contemporary apartments at affordable prices. At its Moorabbin project Steller sells at $6,000 – $6,100 per square meter. Competitors offering a similar quality product in the area sell for around $7,000 per square meter. Its developments are located within walking distance of public transport and major supermarkets. Buyers recognise the livability and the true value of the property evident in the 75 per cent owner-occupied rate.
For more information, please visit: www.steller.com.au
