Developers Struggling to acquire Funding.
Category Property Fund News
South African developers looking to obtain finance to build and sell - or build and rent out properties such as townhouse complexes, flats, or retirement developments, are struggling to acquire funding from banks. This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says due to the bad debt that was accumulated as a result of residential developers defaulting during the financial recession, banks are wary of approving loans to developers who haven’t secured the required level of pre-sales for the transactions where developers are looking to build and sell to third parties. Banks are also wary of financing developers who are looking to build, hold and rent out, because pre-lets are difficult to obtain prior to construction - and normally residential leases are only signed for 12 months. Palmer says after the financial recession, the South African property market shifted its property investment preference from residential to commercial property, due to commercial property being a safer and more lucrative investment at the time. Over the past few years the market has, however, shifted its preference to residential property once again, as the demand for residential rentals has been increasing steadily. “This trend is evident in the increase in loan applications for capital to build and sell, or to build and hold residential property developments. We believe that it is due to the increase in the demand for rentals. However, we are finding that the banks have not yet adapted to this trend, and still have tight policies in place when it comes to lending to residential developers. “In certain areas we are seeing unprecedented demand for residential rentals with rental escalations of 7 to 10 percent, with less than 1 percent vacancy also being achieved,” he says. Palmer says most South African lenders require pre-sale agreements to be in place when dealing with residential development finance, which is a contract that states that the property in question must be sold before a developer’s loan is paid out, and is often required by lenders as it provides assurance that the developer will have the capital available to repay the loan taken to develop the property. Banks often require a condition of 120 percent pre-sale requirement, which he believes is unrealistic and difficult for developers to obtain. Another reason why banks don’t often approve loans to developers for residential property in South Africa is because, in the past, developers have not been able to sell the units that have already been developed, leaving them unable to repay the loan and resulting in the bank having an incomplete building to pay off. However, developers who are struggling to obtain funding for a development from banks could consider alternatives such as non-bank lenders that are able to provide short-term, asset-backed funding secured against residential, office, industrial and retail properties, says Palmer. As a result of the stricter lending regulations in South Africa, he has experienced an increase in the number of property developers seeking alternative solutions. “These alterative solutions are often able to provide individuals with tailored options that will suit their requirements should a bank not be able to assist with a certain situation.”
Author: SAPOA
