Seizing opportunities with preferential equity
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As market conditions for financing become more challenging for property developers, new ways of bridging the financing gap are emerging to expedite projects and seize new opportunities.
Strong growth in the Australian property sector continues to present new opportunities for developers to redeploy capital into the market, offering higher returns. However, traditional routes to new finance are not always as nimble as the demands of the market.
Development Finance Partners (DFP) director Baxter Gamble is observing a rise in the strategic use of preferential equity as a fast method of attaining funding. “Utilising preferential equity allows developers to capitalise on the current property market, which is enjoying a buoyant climate, and seize opportunities in a timely way,” Gamble says.
Preferential equity is a hybrid of debt and equity financing that effectively fills the gap between what a bank will fund and what the developer needs to contribute towards the cost of a project.
“This method means developers don’t have to wait to complete an asset to dispose and recycle equity. The drawcard of preferential equity is it significantly cuts time to market and allows developers to access equity in order to act with speed in the current demanding climate,” he says.
As preferential equity is not available from major banking institutions, it has often been overlooked as a viable solution to sourcing funding, but Gamble says it proposes a solution that’s in keeping with developers’ current concerns.
Recently, DFP worked with residential developer Steller on a medium-density project in Noble Park, Victoria, structuring a preferential equity deal to fast-track the funding process.
Gamble notes the Noble Park project highlighted issues that many developers are currently experiencing. Specifically, Steller had significant equity tied up in several projects that had commenced or were poised to start. They required relatively small amounts of preferential equity, and DFP structured an equity solution, within 14 days, which provided the preferential equity to 91 per cent of TDC.
Nicholas Smedley, managing director at Steller, said “From a developer perspective it allowed us to access locked equity on order to fund our next project. The well-structured deal, which was circa a few million dollars, was not readily available from banks and DFP offered a viable solution.
“Preferred equity is certainly a solution that we will use again to unlock the funds we need to support future growth,” he said.
The accelerated financing allowed Steller to source the required equity to leverage a new opportunity in another development.
“This freed up cash for Steller to identify a further opportunity and act on it,” Gamble says. “Preferential equity is a wise option that gives developers the ability to act now rather than later.”
For more information visit: http://www.dfpartners.com.au/preferential-equity/