What Are the Circumstances That May Lead to You Having a Gap in Your Funding?
When it comes to securing funding for development, we see many circumstances that can lead to a gap in funding. Understanding these potential scenarios is essential for achieving success. Here we’ll explore three of the most common recent causes of gaps in development finance: low bank valuation, the ongoing increases in construction costs we’ve seen in 2022 and 2023, and cash flow issues during construction.
In some cases, banks may provide a valuation on your project that gives you an estimated value lower than what you need to secure financing and fully fund your project. In this scenario, trying to cover the gap can seem difficult but in many cases there are options available. You may be able to find credit elsewhere through alternative lenders or structuring, even if your valuation comes in low. Strategically leveraging an existing partnership or forming a new one may open up options that weren’t offered by the bank. Although it may be challenging to cover the gap between what you need and the estimated value of your project, there are still solutions and opportunities that could lead you towards success.
Construction cost increases in 2022 and 2023
The Cordell Construction Cost Index shows that over the 12 months to September 2022, Victoria recorded an increase of 12.3 per cent in residential construction costs, around double the general inflation rate for the period. The after-effects of the pandemic, labour shortages, and the increasing costs of raw materials and fuel have all contributed to recent increases in construction costs. It’s not uncommon for costs associated with a construction project to increase over time, but inflationary pressures and rising interest rates have supercharged recent cost increases in some areas.
In 2023, the pressure is unlikely to slacken, as a backlog of buildings approved during the early days of the pandemic still exists and many businesses are facing labour shortages. As a result, it’s essential to plan ahead. For developments in the planning stages, persistent increases in construction costs should be taken into account. Being organised and aware of all potential expenses will help developers make informed decisions about where to allocate funds and prevent any major budget issues.
Cash flow issues during construction
To make sure your financing isn’t derailed by cash flow issues during construction, it's important to have a plan in place for managing the finances of your project. This should include having a detailed understanding all of the expenses associated with your project. Having a reliable contractor who can accurately estimate costs and stick to a timeline is also essential. Staying organised and consistently monitoring the financial progress of your project can help you identify any potential problems early and create strategies to help you avoid them. With adequate planning and management, cash flow issues won't be an obstacle to securing funding for your project.
Work with MFEG on your next project
Our team has a proven track record of creating and arranging finance solutions for a variety of property development projects. We're proud to have collaborated with a large number of excellent developers to bring exceptional projects to the market. Whether it be land financing, residual stock financing, or business loans, we are constantly looking for more outstanding developers to collaborate with. Get in touch with our team today.