Property development can be a highly effective way to create value in the New Zealand property market, but it also raises many questions for both new and experienced developers. From understanding equity requirements to navigating construction funding structures, the process involves a number of financial and strategic considerations.
Our property development FAQ and glossary blog, we address some of the most common questions developers ask when planning a project. By understanding development finance, the risks involved, and what lenders typically expect, developers can approach their projects with greater confidence and clarity.
How Much Equity Do I Need for Property Development?
Most property development projects require developers to contribute between 20% and 30% of the total project cost as equity, although the exact amount depends on the lender and the project risk profile.
Equity may come from cash contributions, land already owned, retained profits from previous developments or even enabling works done prior drawing down from a development funding loan facility.
Lenders use equity requirements to ensure developers have financially committed to the project – effectively ensuring they have “skin the game”. Experience from past cycles, including the Global Financial Crises, has shown that risk tolerance can differ significantly when deveopers are using external capital versus their own funds. It also provides a buffer for the lender against increases in construction costs or a softening in sale prices.
Stronger equity positions can improve the likelihood of funding approval and provide greater flexibility when structuring development finance.
How Long Are Development Loans?
Development loans are most commonly structured for 12 months, although this can vary depending on the size and complexity of the project. Smaller standalone spec builds may be suited to shorter terms (e.g. 6 months), while larger or multi-stage developments are often structured with a 12-month term and extension options. Construction programmes, product type, and the proposed exit strategy all play a role in determining the appropriate loan term.
The loan term typically runs from the first drawdown – which may include land settlement for shovel-ready projects or refinancing an existing pre-development facility – through to construction and completion. Because development projects progress in stages, funding is normally advanced through progress drawdowns as construction milestones are reached rather than as a single lump sum. This staged structure helps align funding with the project timeline and ensures costs are released as work is completed.
Do I Need Presales to Secure Development Finance?
Presale requirements vary significantly between lenders. Main banks often require high levels of presale cover (in some cases up to 120% of the debt), whereas non-bank lenders such as ASAP Finance may fund projects without any presales.
The majority of projects we fund at ASAP Finance commence without initial presale cover, with developers typically choosing to market and sell the properties during the construction phase.
It is also important to note that presale requirements are often deal-specific. Larger or higher-risk developments may require stronger presale cover, while simpler projects with higher equity contributions may not require any presales at all.
What Happens if Construction Costs Increase?
If construction costs increase during a project, developers typically rely on contingency allowances within the feasibility model to absorb unexpected expenses.
Cost increases can occur due to material price changes, labour shortages, or unforeseen site conditions. Because development projects often run for many months, it is important that your feasibility includes realistic construction estimates and adequate contingency buffers. Understanding and planning for property development risks early helps ensure projects remain financially viable even if costs rise during construction.
If the contingency within the facility is fully utilised and insufficient funds remain to cover cost overruns, the developer may be required to contribute additional equity. This is one of the key reasons lenders assess the borrower’s financial position and overall strength when structuring the facility.
What Is a Property Development Feasibility Study?
A property development feasibility study is a financial analysis used to determine whether a development project is likely to be profitable.
A feasibility study typically assesses factors such as land acquisition costs, construction costs, professional fees, financing/holding costs, and the projected end value of the completed development. Developers use a ‘feasibility’ to understand potential returns and identify risks before committing to a project. Lenders also review feasibility models carefully when assessing development finance applications to ensure the project remains viable under different market conditions.
Can First-Time Developers Get Development Finance?
Yes, first-time developers can obtain development finance, although lenders generally assess these projects more carefully.
Without an established development track record, lenders may limit or reduce key funding metrics, or place greater emphasis on the developer’s financial position, experience of the builder and wider team of consultants. Many new developers begin with smaller projects or work alongside experienced professionals to strengthen their funding applications. ASAP Finance provided this type of assistance for a nine-unit block in Mt. Wellington project led by first-time developers.
Property Development Glossary
Development Finance
Development finance refers to specialised funding used to support property development projects. These loans typically short or fixed-term loans (often around 12 months) and cover land acquisition or refinance of pre-development loan facilities, construction costs, and project-related expenses. They are structured around the project timeline.
Equity
Equity is the developer’s financial contribution to the project. It may come from cash, land value, retained profits or funds injected into the development such consenting costs and construction. It represents the developer’s share of the project’s total cost.
Feasibility Study
A project “feasibility” evaluates the financial viability of a development project by comparing total development costs with the projected value of the completed project.
Gross Realisation Value (GRV)
GRV refers to a project’s Gross Realisation Value – the estimated total revenue of the development, being the combined value of all properties once completed and sold or refinanced. Lenders commonly use GRV as a key metric when assessing project viability.
Loan-to-Cost (LTC)
Loan-to-cost (LTC) measures the percentage of total project costs that a lender is willing to fund. Total project costs typically include land acquisition, consenting, construction, professional and consultant fees, finance and holding costs, and contingency. It is a key metric used to determine the level of equity required from the developer.
Presales
Presales occur when properties within a development are sold off-plan i.e. before construction is completed. Lenders may require presales to demonstrate market demand, validate price points, and strengthen the project’s exit strategy.
Progress Drawdowns
Progress drawdowns refer to the staged release of development funding as construction milestones are completed. Lenders typically require quantity surveyor reports before each drawdown.
Development Finance Guidance from ASAP Finance
Property development involves many moving parts, and understanding how funding structures work is an important part of managing risk and ensuring project viability.
At ASAP Finance, we work with developers to structure development and construction loans that support projects from site acquisition through to completion. By aligning finance structures with project timelines and feasibility models, developers can approach their projects with greater certainty.
If you are planning a development or want clarity around how property development finance works, get in touch with the team at ASAP Finance to discuss your plans.