How Development Finance Works in Australia

Property development can create opportunities to build residential, commercial and mixed-use projects. However, purchasing a development site, obtaining approvals and funding construction requires careful planning and an appropriate funding structure.

Development finance is a specialist form of funding used to help finance property development projects. Depending on the project and lender, it may support land acquisition, construction costs, or both.

Unlike a standard residential home loan, development finance is generally assessed against the borrower, the property, the project's financial feasibility, the proposed development and the strategy for repaying the loan.

New Direction Finance can discuss your proposed development and help you explore funding options relevant to your project and circumstances.

What Is Property Development Finance?

Property development finance is funding arranged for projects involving the development, construction or substantial redevelopment of property.

Depending on the lender and transaction, funding may be considered for:

• Residential townhouse and unit developments.
• Small and medium-scale apartment projects.
• Subdivision and land development.
• Commercial property development.
• Mixed-use developments.
• Construction following the acquisition of a development site.
• Certain refurbishment or redevelopment projects.

The structure of a facility depends on the project's scale, planning status, security, costs, expected end value and proposed exit.

How Does Development Finance Work?

1. Assessing the development opportunity

The first step is understanding the proposed project. A lender or funding adviser will generally want to know:

• What property is being acquired or developed?
• What planning approvals are in place?
• How many dwellings or commercial lots are proposed?
• What are the estimated development costs?
• What is the anticipated completed value?
• How much equity can the developer contribute?
• How will the loan be repaid?

2. Preparing the development feasibility

A development feasibility estimates the project's costs, revenue and expected financial outcome. It may include land acquisition, stamp duty, professional fees, construction costs, contingency allowances, finance costs, marketing expenses, gross realisation value and estimated development profit.

The feasibility should be supported by realistic assumptions. If projected sales revenue falls or construction costs rise, the project's financial position may change significantly.

3. Establishing the funding structure

The funding structure determines how much capital may be available, how the developer contributes equity and how funds are drawn.

Depending on the transaction, a facility may cover eligible land and construction costs, with funds released progressively as construction advances. A headline loan-to-cost or loan-to-value ratio should not be treated as a guaranteed funding amount.

4. Completing lender assessment

The lender will assess the borrower and project, including relevant financial information, the security property, valuation, feasibility, planning position, construction arrangements and repayment strategy.

Depending on the facility, the lender may require a quantity surveyor's report, builder information, pre-sale contracts, guarantees or other supporting documents.

5. Approval, documentation and settlement

If the lender is prepared to proceed, it may issue indicative terms or formal credit approval, subject to its process and conditions.

The developer should carefully review interest rates, fees, loan term, security requirements, drawdown conditions, repayment requirements and default provisions before accepting a facility.

6. Construction and progress drawdowns

For construction facilities, funds may be released in stages as work progresses. The lender may require progress inspections, certification and updated cost-to-complete information.

Developers should maintain sufficient liquidity to manage timing differences, unexpected expenses and costs that are not covered by the facility.

7. Repaying the facility

The exit strategy explains how the development loan will be repaid. Common approaches include:

• Selling completed dwellings or commercial property.
• Selling the completed development as a whole.
• Refinancing into longer-term investment or commercial debt.
• Retaining completed property to generate rental income, where a viable funding structure is available.

The lender will assess whether the proposed exit is realistic and supported by the project economics and relevant evidence.

What Costs Can Development Finance Cover?

Depending on the lender and facility, development funding may contribute towards eligible costs such as land acquisition, construction and certain project expenses.

However, not all costs will necessarily be funded. The developer may need to contribute equity towards deposits, professional fees, cost overruns, interest, taxes or other expenses.

A complete feasibility should identify both the costs expected to be funded and those that must be covered from the developer's own resources.

How Much Equity Is Required?

There is no single equity requirement that applies to every Australian development project.

The required contribution can depend on:

• The lender's credit policy.
• The land value and purchase price.
• Total development costs.
• The project's projected end value.
• The developer's experience and financial position.
• Planning and construction risks.
• Pre-sales and the intended exit.
• Available security and guarantees.

A lender may assess the developer's existing equity in the site, available cash and other acceptable contributions. The amount of equity recognised by a lender may differ from the developer's own estimate.

Bank, Non-Bank and Private Development Funding

Developers may explore different categories of funding providers.

Banks may offer development facilities subject to their lending policies, project requirements and credit assessment.

Non-bank lenders may have different credit criteria, funding structures and appetite for particular development types.

Private lenders may consider transactions that fall outside some traditional lending criteria, but terms, pricing, security requirements and risk can differ materially.

The most appropriate option depends on the transaction rather than the lender category alone. Compare the total cost, conditions, timing, security and repayment obligations before making a decision.

Common Development Finance Challenges

Several issues can complicate a development funding application:

• An incomplete or unrealistic feasibility.
• Insufficient available equity.
• Planning approvals that remain outstanding.
• Construction costs that are not adequately supported.
• A builder or contract that the lender will not accept.
• Pre-sales that do not satisfy lender requirements.
• An unclear repayment or exit strategy.
• Insufficient contingency or liquidity.

Preparing the project information before approaching lenders can help identify gaps and make the funding discussion more productive.

How New Direction Finance Can Help

New Direction Finance can discuss your proposed development, funding objectives and relevant circumstances to help you explore potential finance options.

A preliminary discussion may cover the project type, site status, estimated costs, equity position, approvals, anticipated end value and intended exit.

Any funding proposal remains subject to the relevant lender's criteria, due diligence, valuation, documentation and approval.

Frequently Asked Questions

What is development finance used for?

Development finance may be used to fund eligible land acquisition, construction and other approved project costs. The permitted uses depend on the lender and facility.

Can I obtain development finance before receiving planning approval?

Some lenders may consider projects at an earlier planning stage, while others require specified approvals before proceeding or drawing funds. The available options depend on the project and lender.

Do development finance lenders require pre-sales?

Some lenders require pre-sales, while others may assess projects without them. Requirements depend on the lender's policy, project size, security, risk profile and exit strategy.

How long does development finance take to arrange?

Timing varies according to project complexity, the completeness of the application, valuation requirements, due diligence and lender processes.

Can a first-time developer obtain funding?

Possibly. A lender may consider the experience of the wider project team, available equity, project scale, builder, feasibility and other risk factors.

What happens if construction costs increase?

An increase in costs can affect the feasibility, funding requirement and amount of capital needed to complete the project. Contingency allowances and sufficient liquidity are important.

Is development finance the same as a standard home loan?

No. Development finance is generally assessed around the project, construction costs, security, feasibility, borrower and repayment strategy. A standard home loan follows a different assessment and repayment structure.