In a latest report, it is found that 17 percent of property development projects in Australia do not meet financial expectations!
This is the reason why it is important to know these obstacles and how to overcome financial hurdles in real estate development.
From funding to planning the unexpected costs, various barriers can stop the projects and let them crash.
In this blog post, we will understand some common financial hurdles in property development and give practical advice on how to overcome them.
Understanding Common Financial Hurdles
Before we can jump into solutions, let us briefly indicate some of the common financial obstacles facing property developers in Australia:
- Less capital
- Higher construction cost
- Unexpected expenses
- Changing property market conditions
- Stringent lending standards
- Difficulty in managing cash flow
- Tax effects
Now let’s take practical strategies to overcome these challenges and also improve the project’s financial viability
1. Securing Funding
Something that many consider a critical step in property development is ensuring you have enough cash. Whether you are experienced in the development or a first-timer, banks and other lending institutions usually use stiff lending criteria. These lenders will look at the viability of your project, your creditworthiness, and the level of risks before giving you any form of loan.
How to approach this challenge:-
- Develop an elaborate financial plan indicating all possible costs
- Diversify funding sources with consideration to bank loans, private lenders, and joint ventures
- Explore the possibilities of using mezzanine financing in case funding was not fully accessible
- Lay strong relationships with lenders to enhance the chances of getting a good deal
2. Manage Construction Costs Effectively
Rising construction costs can quickly erode your profit margins.
Here are some strategies to keep costs under control:
- Obtain multiple quotes from reputable contractors
- Use fixed-price contracts where possible to minimise cost overruns
- Consider value engineering to reduce costs without compromising quality
- Implement rigorous project management to prevent delays and associated costs
3. Budgeting And Cost Overruns
One of the biggest mistakes that are common during property development is that the development underestimates its costs. Most developers forget the project’s unforeseen expenses and end up with a budget overrun as well as prolonging the completion date. Additional costs can either be construction delays or rising material costs or even other site-related issues that were not anticipated at all.
Always include a contingency budget of 10-15% of the overall cost for a project as a reserve for extraneous and unforeseen costs. Monitor the budget closely and review the financial plan regularly.
4. Budget For Contingencies
Unforeseen expenses are almost inevitable in property development.
To tackle their impact:
- Include a contingency fund of at least 10% of your total budget
- Regularly review and update your budget throughout the project
- Prioritise addressing issues promptly to prevent escalation of costs
5. Cash Flow Management
Poor cash management might result in the sudden termination of a project. Funding or payment from investors may be delayed and, with more expenditure, money for payables would run out of pocket.
Strict practices of cash management should be followed. Funding sources aligned with the timelines of your project and milestones should be established. Short-term financing involving bridging loans should also be provided to ensure cash flow is maintained at critical moments of the project.
6. Regulatory Requirements
Australian property development is always associated with complex legal and regulatory environments. And among possible causes for delay and extra costs are compliance with zoning law, environmental assessment or what is required at the council level.
Close cooperation from the side of your experience legal or planning consultants to deal with the specifics of the property development; they may help you to gain compliance with all regulations and allow the process to run as smoothly as possible.
7. Stay Informed About Market Conditions
The property market can be volatile, affecting both your costs and potential returns.
To handle market fluctuations:
- Conduct thorough market research before committing to a project
- Regularly monitor market trends and adjust your strategy accordingly
- Consider staging your development to reduce exposure to market risks
- Diversify your portfolio across different locations and property types
8. Delayed Sales Or Rental Income
For a developer, it may also arise from the cash crunch due to delays in selling units or garnering rental income. Property will only hold up and have costs associated if it is unsold or vacant for a prolonged period.
Good marketing strategies should be considered from early stages of the project to attract buyers or tenants. Off-the-plan sales or pre-leasing agreements can secure the revenue prior to construction completion. Other ways to help expedite sales include flexible payment options or incentives.
9. Optimise Tax Strategies
Understanding and optimising your tax position can significantly impact your project’s profitability.
Consider the following:
- Consult with a tax professional specialising in property development
- Take advantage of available deductions and depreciation benefits
- Structure your development entity (e.g., company, trust) for optimal tax outcomes
- Plan for GST implications throughout the project lifecycle
Looking For Expert Property Development Financing?
This seems to be a pretty tough task, but with the right solutions regarding financing, your dream may come to life. Credit Hub offers independent, experienced brokers who will guide you through all aspects of financing your project. Let’s get in touch today and streamline your financing process so you can focus on bringing your property development to life.
Disclaimer:
The information presented by staff or employees of Credit Hub and its associated companies is provided for general informational purposes only. We do not guarantee the accuracy, completeness, or timeliness of the data or views presented. Audience members should conduct their own research and verify any information before relying on it. Credit Hub and its associated companies are not liable for any errors or omissions, or for any actions taken based on the information presented.