Property development finance is specialized lending for residential and commercial property development projects in Australia. Whether you're planning townhouses, units, subdivisions, or commercial developments, understanding development finance is critical to project success.
What is Property Development Finance?
Development finance funds the construction of new properties for sale:
Typical development projects:
- Townhouse developments (3-20 units)
- Unit/apartment blocks
- Land subdivision
- Dual occupancy/duplex
- Commercial developments
- Mixed-use projects
- House and land packages
Unlike standard mortgages:
- Funds released in stages (not lump sum)
- Based on end value (GRV - Gross Realisation Value)
- Requires feasibility study
- Interest often capitalized
- Shorter terms (12-24 months)
Development Finance Rates & Costs
Interest rates 2025:
- Bank development loans: 7-10% p.a.
- Private development finance: 9-18% p.a.
- Mezzanine finance: 15-25% p.a.
Additional costs: ✅ Line fee: 1-3% of loan amount ✅ Valuation: $3,000-$15,000 ✅ Quantity surveyor: $5,000-$20,000 ✅ Legal fees: $3,000-$10,000 ✅ Progress inspection fees: $300-$800 per draw
Example $2M development:
- Loan amount: $1.4M (70% LVR)
- Rate: 12% p.a.
- Line fee: 2% = $28,000
- Interest (12 months): $168,000
- Total cost: $196,000+
How Development Finance Works
The Funding Structure
Loan to Value Ratio (LVR):
- As-is land value: 65-75% max
- End value (GRV): 60-75% max
- Total Development Cost (TDC): 70-85% max
Example $3M project:
- Land value: $800,000
- Construction cost: $1,800,000
- Total Development Cost: $2,600,000
- Gross Realisation Value: $3,600,000
Funding available:
- 70% of GRV = $2,520,000
- Or 75% of TDC = $1,950,000
- Loan: $1,950,000 (whichever is lower)
- Your equity needed: $650,000
Progressive Drawdowns
Funds released in stages based on construction progress:
Stage 1: Land Acquisition (20-30%)
- Purchase the land
- First draw: $390,000
Stage 2: Base/Slab (15-20%)
- Foundation complete
- Draw: $292,500
Stage 3: Frame (20-25%)
- Frame and roof
- Draw: $390,000
Stage 4: Lock-Up (20-25%)
- Windows, doors, external complete
- Draw: $390,000
Stage 5: Fixing (15-20%)
- Internal fit-out
- Draw: $292,500
Stage 6: Completion (5-10%)
- Practical completion
- Final draw: $195,000
Each draw requires:
- QS/builder progress report
- Site inspection by lender
- Invoices for work completed
- Usually 5-10 business days to fund
Bank vs Private Development Finance
Bank Development Loans
Advantages: ✅ Lower rates (7-10% p.a.) ✅ Higher LVRs (up to 80-85%) ✅ Longer terms available ✅ Established processes
Requirements: Strong credit history Development experience required Pre-sales often required (30-70%) Conservative valuations Lengthy approval (6-12 weeks) Strict serviceability
Best for: Experienced developers with strong financials and pre-sales
Private Development Finance
Advantages: ✅ Fast approval (1-3 weeks) ✅ Flexible criteria ✅ First-time developers OK ✅ No/low pre-sales ✅ Asset-focused lending ✅ Creative deal structures
Trade-offs: **Higher rates (9-18% p.a.) **Lower LVRs (60-75%) **Higher fees (2-3% line fee) **Shorter terms (12-18 months)
Best for:
- First-time developers
- Quick settlements
- Projects banks won't touch
- Borrowers with credit issues
- No pre-sales yet
Pre-Sales Requirements
Banks typically require:
- Small developments (4-10 units): 30-50% pre-sold
- Medium (10-30 units): 50-70% pre-sold
- Large (30+ units): 70%+ pre-sold
Pre-sales must be:
- Unconditional contracts
- 10% deposits paid
- Buyers approved for finance
- Valuer-accepted
Private lenders:
- Often no pre-sales required
- Focus on end value and exit
- Project feasibility more important
- Borrower equity contribution key
Feasibility Study Essentials
Every development needs feasibility analysis:
Revenue Side
Gross Realisation Value (GRV):
- 5x townhouses @ $650k = $3,250,000
- Sale costs (3% agent) = -$97,500
- Net GRV: $3,152,500
Cost Side
Total Development Costs (TDC):
- Land: $800,000
- Construction: $1,750,000 ($2,000/m² x 875m²)
- Professional fees: $120,000 (6%)
- Council fees: $80,000
- Finance costs: $180,000
- Marketing: $50,000
- Contingency: $175,000 (10%)
- Total TDC: $3,155,000
Profit Calculation
- GRV: $3,152,500
- TDC: $3,155,000
- Profit: -$2,500 (0% margin)
This project doesn't work!
Need 20%+ profit margin for viable project
Exit Strategies
How will you repay the development loan?
1. Sell Down Strategy (most common)
- Sell units as completed
- Use sale proceeds to repay loan
- Keep 1-2 units for rental/hold
2. Complete Sell-Out
- Sell all units
- Repay full loan
- Take profit and exit
3. Refinance to Hold
- Complete development
- Get end-value valuation
- Refinance to investment loan
- Hold for rental income
4. Pre-Sales
- Sell units off-the-plan
- Settlements after completion
- Use settlements to repay
Lenders want to see:
- Clear, realistic exit strategy
- Market evidence supporting sales prices
- Timeline for exit (usually 18-24 months)
- Contingency if Plan A fails
Common Development Finance Mistakes
1. Undercapitalized Projects
Not enough equity buffer No contingency fund Cost blowouts cause failure
✅ Solution: 15-20% contingency, extra equity buffer
2. Overoptimistic Valuations
Assuming top market prices Not accounting for market downturn Ignoring sale costs
✅ Solution: Conservative valuations, 10% safety margin
3. Underestimating Timeframes
Construction delays Sales take longer than expected Interest capitalization exhausted
✅ Solution: Add 6 months to all timelines
4. Wrong Finance Structure
Using private when bank would approve Insufficient LVR Wrong loan type
✅ Solution: Talk to broker early, get structure right
First Development Checklist
Before seeking finance:
✅ Site secured: Deposit paid or option agreement ✅ Feasibility done: 20%+ profit margin ✅ Due diligence: Town planning, contamination, services ✅ DA approval: Approved or near-approval ✅ Construction quote: Fixed price or detailed estimate ✅ Sales evidence: Recent comparable sales ✅ Team assembled: Builder, architect, engineer, QS ✅ Equity ready: 25-40% of TDC in cash ✅ Exit strategy: Clear plan to repay loan
Development Finance Approval Process
Timeline: 2-8 weeks depending on lender
Week 1-2: Initial Assessment
- Submit preliminary proposal
- Lender reviews feasibility
- Indicative terms issued
Week 2-4: Due Diligence 4. Full application submitted 5. Valuation ordered 6. QS report (if required) 7. Legal review 8. Credit assessment
Week 4-6: Approval 9. Credit committee review 10. Formal approval issued 11. Loan documents prepared
Week 6-8: Settlement 12. Sign loan documents 13. Pay line fee and costs 14. First drawdown (land purchase)
Private lenders: Can do this in 7-14 days
JV vs Development Finance
Alternative: Joint Venture with funder
Instead of a loan:
- Funder provides 100% money
- You provide expertise/land
- Profit split 50/50 (or agreed %)
- No interest charges
- No repayments
Comparison $2M project:
Development Loan:
- You contribute: $500k equity
- Borrow: $1.5M
- Interest: $180k
- You keep: 100% profit after loan
- Your return on $500k equity
JV Partnership:
- You contribute: $0-100k
- Partner contributes: $1.9M+
- No interest
- 50/50 profit split
- Your return on minimal equity
JV is better when:
- You lack equity
- You have expertise/experience
- You have great deal/site
- You want to share risk
Loan is better when:
- You have equity
- You want full profit
- You want full control
Property Development Finance Tips
Getting approved:
- Strong feasibility - Conservative numbers, 20%+ margin
- Experience - Partner with experienced developer if first time
- Equity - Have 25-40% of TDC ready
- Team - Professional builder, architect, QS
- Market evidence - Strong sales comparables
- Exit strategy - Clear, realistic repayment plan
Reducing costs:
- Try banks first (if you qualify)
- Shop multiple lenders
- Negotiate line fees
- Consider JV if low equity
- Start pre-sales early
Managing the build:
- Use experienced builder
- Fixed-price contract preferred
- Have contingency fund
- Monitor progress closely
- Start sales/marketing early
Need Development Finance?
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