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Development Finance

What is Property Development Finance?

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Quick answer

Lenders typically fund

60% 75%

Of the total development cost

  • Construction drawdown stages 6 Stages
  • Min profit margin lenders want to see 15-20%
  • LVR or LTDC assessment bases 2 methods
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Property development finance is a type of loan used to fund the purchase of land and the construction of property that will later be sold or refinanced.

It is commonly used by developers building projects such as townhouse developments, apartment buildings, land subdivisions, or commercial developments.

Unlike standard property loans, development finance is usually structured as a short term construction facility where funds are released progressively as the project is built

What projects are funded?

Property development finance is designed specifically for projects where property is being created, significantly renovated, or subdivided

The purpose of the loan is to fund both the land acquisition and the construction costs required to complete the development

Typical projects funded include:

  • iconTownhouse developments
  • iconApartment developments
  • iconLand subdivisions
  • iconHouse and land projects
  • iconMixed-use developments
  • iconCommercial developments

How Development Finance Works

Development loans are usually structured differently from normal property loans

Instead of providing the full loan amount upfront, lenders release funds in stages during construction.

Typical drawdown stages may include:

  • 01 Land settlement
  • →
  • 02 Slab stage
  • →
  • 03 Frame stage
  • →
  • 04 Lock-up stage
  • →
  • 05 Fit-out stage
  • →
  • 06 Completion

A quantity surveyor or lender representative normally verifies each stage before the next portion of the loan is released

Loan Size and Structure

Developement loans are normally based on either:

Method 01

Loan to value ratio (LVR)

LVR — assessed as a percentage of the property's completed or current market value

Method 02

Loan to total development cost (LTDC)

LTDC — assessed as a percentage of the total cost to complete the development

Lender funding range 60–75%
  • Lender funds (60–75% of total development cost)
  • Developer contributes (25–40% via cash deposit or equity)

Most lenders fund approximately 60 percent to 75 percent of the total development cost. The developer contributes the remaining funds through cash deposit or equity.

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Development Feasibility

Before approving finance, lenders require a development feasibility assessment

This evaluates whether the project is financially viable

A feasibility typically includes

  • iconLand purchase cost
  • iconConstruction costs
  • iconProfessional fees
  • iconMarketing and selling costs
  • iconContingency allowances
  • iconTotal development cost
  • iconProjected sale values
  • iconDeveloper profit margin
15 - 20 %
Most lenders want to see a profit margin of around 15 percent to 20 percent or higher before approving development finance. A strong feasibility study showing viable returns is essential for loan approval

Pre Sales

For larger developments, lenders may require pre sales before construction begins

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What are pre sales?

Pre sales are signed contracts from buyers agreeing to purchase completed properties before construction is finished.

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Why lenders require them

These contracts reduce risk for lenders by showing that the finished development will generate sufficient revenue to repay the loan

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Smaller development

Smaller developments often do not require pre sales depending on the lender and the overall strength of the deal

Common problems

Many development finance applications are declined because important parts of the project are incomplete or not commercially viable

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Insufficient Equity

Developers usually need to contribute 20 percent to 35 percent of the total development cost

Possible solutions include:
  • icon Use equity from other property
  • icon Bringing in joint venture partners
  • icon Using private development lenders
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Planning Approval not yet Obtained

Some lenders require planning approval before funding a project

If approvals are not yet in place, borrowers may need to secure:
  • icon Development approval funding
  • icon Short term land funding
  • icon Alternative development lenders
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Low Project Profit Margin

If the projected profit margin is too low, lenders may consider the project too risky

Adjusting the development design or improving projected sale values may help.
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Lack of Development Experience

First time developers can find it harder to obtain development finance

Solutions may include:
  • icon Partnering with experienced builders or developers
  • icon Starting with smaller development projects
  • icon Using lenders that specialise in first time developers
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Steps To Get Development Finance

Step

01

Identify a development site and prepare the project concept

Step

02

Obtain planning approval or prepare development plans

Step

03

Estimate construction costs and complete a development feasibility study

Step

04

Determine how much equity or deposit you can contribute

Step

05

Submit the development proposal to lenders that specialise in development finance

Step

06

Once approved, funds are released progressively during construction until the project is completed

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Speak with a Development Finance Specialist

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Property development finance can vary significantly depending on the project size, location, approvals, and the developer's experience.

A specialist can review your project and help determine which lenders may be able to fund it.

Speak with a finance specialist about your development project.

Submit the short form below and a development finance specialist will review your project and discuss possible funding options.

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Additional Questions

You may also find these questions helpful

Helpful Property Finance Guide

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Guide to construction finance

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Understanding development finance

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Commercial property lending explained

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How property refinancing works

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