Tag: Mortgages

Property Development FAQs and Glossary for NZ Developers

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.

Property Development Finance: Risks and How to Mitigate Them

Property development offers significant opportunities to create value in the New Zealand property market, but it also involves a range of risks that must be carefully managed. From construction cost increases to market fluctuations and funding constraints, even well-planned projects can face challenges if potential risks are not identified and mitigated.

While these risks are widely understood at a high level, what matters in practice is how they affect a project’s ability to be funded, delivered, and exited successfully. Lenders assess projects through this lens, which means developers who take a structured approach to risk are better positioned to secure funding and achieve consistent outcomes.

Common Property Development Risks

Once you understand how property development finance works, the next step is to familiarise yourself with the potential risks that accompany each project. Property development projects face several categories of risk that can affect both project viability and profitability. While these variables cannot always be eliminated or controlled, experienced developers plan for them early and structure their projects to reduce potential impacts.

Construction Delays and Cost Overruns

Construction risk remains one of the most significant challenges in property development. Cost increases, labour shortages, and delays can all impact both timeline and total project cost. Even relatively modest overruns can reduce profit margins, particularly where projects are tightly structured.

Delays also extend holding costs and interest exposure, which can compound quickly over the life of a project.

To mitigate: Developers typically manage these risks by working with experienced builders, securing fixed-price contracts where possible, and creating detailed cost estimates during the feasibility stage. Including contingency allowances within the project budget also provides a financial buffer if unexpected costs arise. This includes completing critical infrastructure works such as stormwater and wastewater connections, along with driveway construction, prior to vertical build to avoid delays in the titling process. It also involves locking in utility provider agreements early (such as from Vector and Watercare) where upgrades or network capacity constraints may materially impact costs.

Changing Markets

Property markets can shift during the lifecycle of a development project. A project that appears profitable during the feasibility stage may face reduced demand or lower sale prices by the time construction is completed.

Changing economic conditions or buyer preferences can all influence resale values. Developments that take several years from acquisition to completion may be exposed to these types of market fluctuations. The key risk is not that markets move, but that feasibility assumptions fail to allow for it.

To mitigate: Developers often adopt conservative assumptions when estimating projected sale values. Conducting detailed market research, analysing comparable sales, and aligning the project design with local buyer demand can all help improve the likelihood of achieving targeted prices. Obtaining pre-sale cover can provide additional confidence to both lenders and developers by validating pricing assumptions and demonstrating market depth, although it is not always a requirement depending on the funding structure.

Interest Rates and Funding Risk

Because property development projects rely heavily on borrowed capital, financing conditions play an important role in project viability. Rising interest rates, tightening lending criteria, or funding gaps can significantly affect cash flow during the development period.

Interest costs are typically incurred throughout the construction phase, which means unexpected rate increases or delays can materially affect project margins, particularly where funding is structured on a floating basis (e.g. BKBM plus a margin). In contrast, many non-bank lenders provide fixed rates for an agreed term, which offers greater certainty during delivery. However, if the loan term needs to be extended, re-pricing may occur at expiry, which can impact overall project returns.

To mitigate: Developers manage funding risk by stress-testing feasibility models under different interest rate scenarios and maintaining sufficient equity to support the project if conditions change. Working with lenders with extensive development finance experience can also help ensure the funding structure aligns with project timelines.

Planning and Consent Risks

Planning and regulatory approvals are another common source of uncertainty in property development. Resource consent processes, zoning restrictions, infrastructure requirements, or council compliance conditions can all delay project timelines.

Unexpected consent requirements may also increase project costs or require design changes, which can affect feasibility.

To mitigate: Developers typically undertake detailed due diligence before acquiring a site. Engaging planning consultants early and allowing realistic timeframes for approvals can help identify potential issues before construction begins. The quality of consultants and development partners also plays a critical role in the overall success of the project.

How Experienced Developers Manage Development Risk in Practice

Because development projects carry multiple layers of risk, lenders take a structured approach when assessing applications. Their goal is to help projects remain financially viable even if timelines extend or costs increase.

Feasibility Assessment

Before approving funding, lenders assess the project’s financial feasibility in detail. This includes reviewing development costs, projected end values, timelines, and contingency allowances, and considering how the project performs if conditions change.

Equity Requirements and Lending Limits

Development finance is typically structured with defined limits such as loan-to-cost (LTC) and loan-to-value ratios (LVR). These parameters ensure that developers retain meaningful equity in the project and provide a buffer if costs increase or values soften.

Staged Funding During Construction

Funding is generally released in stages as construction progresses. Drawdowns are linked to milestones and verified through inspections or reporting, helping ensure that the project remains on track and that sufficient funds remain available to complete the development.

Structuring for Property Development Success with ASAP Finance

Property development always involves some level of uncertainty. Developers who understand potential risks early are better positioned to structure projects that remain viable even if conditions change. While these risks cannot always be completely removed, they can be anticipated and managed.

At ASAP Finance, we work with developers to structure development and construction loans that shield projects from risks. Our focus is on creating funding frameworks that align with the realities of development projects, giving each project the best chance of success. If you’re planning a development and want guidance on structuring finance for your project, get in touch with the team at ASAP Finance to discuss your plans.

Property Development Finance in NZ: How It Works

Property development can be a powerful way to create value in the New Zealand property market, but it is fundamentally different from traditional property investment. Rather than relying on long-term market growth, development involves actively improving land or buildings, creating value through construction or subdivision, with the intention of generating profit at completion. Property development is often considered a sort-term investment strategy compared with traditional property investment which is a long-term game.

Before committing to a project, one of the most important questions to understand is: how does property development finance work? Unlike a standard residential mortgage, development finance is structured around feasibilities, risk management, staged funding, and clearly defined exit strategies.

What Is Property Development?

Property development refers to purchasing land, or an existing property, to increase its value with the intention of selling the completed project for a profit. The nature of the development – either construction or subdivision – depends on the nature of the site. Unlike property investment, which takes a more passive approach in following market growth, development involves actively finding ways to create value.

What Counts as Property Development?

In the New Zealand context, property development typically includes:

• Renovations or flips
• Constructing new dwellings
• Subdividing land into multiple titles
• Replacing an existing dwelling with higher-density housing (such as townhouses or apartments)
• Converting or redeveloping commercial buildings
• Delivering mixed-use projects

How Development is Different from Property Investment

Property investment typically involves purchasing an existing property to generate rental income – the focus here is on yield and cashflow. After holding the asset for an extended period, subsequent (but often unrealised) profit is also generated from long-term capital gains based on market movements.

Property development is a more active approach to value creation. It requires capital, a feasibility analysis, consultant and contractor coordination, as well as the ability to balance construction and market risks within defined timeframes. Returns are not simply based on the market. In fact, pricing stability is often favourable as it often means less fluctuation in feasibility assumptions. With the exception of a falling market, liquidity and sales activity can be more important than price growth.  Disciplined execution, tight cost control, and a sound exit strategy are key to completing a successful property development project. Making this possible is a well-structured development finance.

How Does Property Development Finance Work?

Unlike a standard home loan, development finance is structured around risk, project timelines, and feasibility. Lenders make assessments holistically, examining the whole development, which includes feasibility assumptions (both as costs and end values), developer experience, consultant and contractor experience, and exit strategy strength. Funding is centred around a mix of equity and layered debt known as the capital stack.

1. The Capital Stack

• Developer equity refers to the capital you contribute to the project, whether as land value or cash. Most lenders require a meaningful equity position to absorb risk and demonstrate commitment.
• Senior debt is the primary loan (first mortgage) facility used to fund land acquisition and construction. It is typically advanced as a percentage of total project cost and/or projected end value.
• Mezzanine finance (or subordinated debt/second mortgages) is a loan that sits behind the senior first ranking mortgage. It is often used to reduce the equity requirement of the developer making their equity go further. The increased leverage can also increase the return on equity metrics; however it also increases funding costs and overall risk associated with the project.

2. Feasibility and Funding Assessment

Before approving a facility, lenders assess the project’s financial viability in detail. This is where many first-time developers underestimate the scrutiny involved. Key metrics typically include:

• Total Development Cost (TDC): land, construction, professional fees, interest, and contingencies
• Gross Realisation Value (GRV): the projected end sale value of the completed project
• Loan-to-Cost (LTC) or Loan-to-GRV ratios: how much leverage is being applied

3. Land Funding vs Construction Funding

Development finance is often structured in two parts. The first is land funding, which supports site acquisition. Depending on timing and structure, this may later roll into the construction facility. The second is construction funding, which covers build costs and associated project expenses. This is usually approved based on completed designs, fixed-price build contracts, and confirmed feasibility. Some projects may require presales before construction funding is fully advanced, although no presale development finance is also viable, depending on the lender and project.

4. Progress Drawdowns During Construction

Unlike residential mortgages, development finance is not advanced as a lump sum. Construction funds are released in stages, aligned to completed works. Before each drawdown, lenders typically require:

• A quantity surveyor (QS) report
• Confirmation of milestone completion
• Updated cost-to-complete assessment

5. Exit Strategy

Every development loan is approved with a defined exit in mind.

Common exit strategies include:

• Selling completed dwellings and repaying the facility
• Refinancing into long-term investment lending
• Staged sell-down of a multi-unit project

Lenders assess the strength and realism of the exit plan as part of approval. Without a clear and achievable exit strategy, even a profitable project on paper may struggle to secure funding.

What Lenders Look for in Development Finance Applications

Development finance approval is driven by risk assessment. Lenders evaluate not just the project, but the developer’s ability to execute and exit successfully.

At ASAP Finance, we structure applications around the factors that materially influence credit decisions.

Experience and Delivery Capability

Track record matters. Lenders assess prior project experience, financial history, and the strength of the wider team – including builders and consultants. For newer developers, conservative project scope and strong professional support become more important.

Equity and Financial Position

A meaningful equity contribution demonstrates commitment and absorbs first-loss risk. Lenders review the source of funds, liquidity, and overall financial capacity to manage unexpected delays or cost increases.

Feasibility Strength

Projected sale values, build costs, timelines, and contingency allowances must be commercially realistic. Lenders will stress-test assumptions to ensure the project remains viable under pressure.

Exit Clarity

Every facility is approved with repayment in mind. Whether through sell-down or refinance, the exit strategy must be credible and supported by market evidence.

Structuring for Property Development Success with ASAP Finance

Development finance is ultimately about aligning risk, structure, and execution. The more disciplined the preparation, the stronger the funding outcome.

The most successful property development projects in New Zealand use an appropriate structure. From acquisition through to exit, every stage of a project carries financial implications. Central to managing risk and protecting margins is close coordination and a sound understanding of how development finance enables value creation.

At ASAP Finance, we work with developers to structure development and construction loans that support projects from site purchase through to completion. Our focus is on creating a financially sound framework aligned with your goals. If you’re considering a development or want clarity around how development finance works for your next project, get in touch with the team at ASAP Finance to discuss your plans.