TIGHTENING credit conditions have broadly put a squeeze on loans to developers, but residual stock loans present a variety of opportunities in different situations to obtain financing, according to Development Finance Partners.
Residual stock loans are written against the completed lot, in a development or lots. That forms the security and the loan is secured against that. They can be short-term, medium-term or longer-term.
DFP’s founder and managing director Matthew Royal explains that there are a number of circumstances in which it would make sense for developers to obtain a residual stock loan, including if there’s a high cost of capital in other parts of the capital structure, and when a developer wants to be able to access their equity that is embedded still within unsold stock.
Royal said the main benefit of residual stock finance to most developers is working capital.
“Working capital often becomes the lifeboat of property developers, especially in a market where presales rates are slow and the settlement rate is slow.
“The forecast that they had in their group for projects to be able to commence, and then complete with capital and profit returns coming back and all of the assumptions that go with the group’s overall forward cash flow, can be significantly impacted if there is a delay in settlements occurring, a delay in projects commencing.
“Residual stock loans, especially residual stock loans that have a revolving line of credit, where you can swap securities in and out over a period of time, it just allows the bigger property developer to reduce some of the lumpiness and the big peaks and troughs in their cash flow out.
“It gives them a more reliable source of capital and certainly potentially at quite low rates.” Royal said.
Visit Development Finance Partners https://www.dfpartners.com.au/ for more information.
Australian Property Journal