Development Finance

Residual Stock Lending

27th May 2024 | Ben Pauley


One thing we are seeing more and more of in this market is residual stock loans. This is where a developer has completed their project but not yet sold down all the units and therefore is looking to refinance the residual balance on their development loan.

It is becoming more common as the market has slowed down and more developers are undertaking projects with limited or no pre-sales. Often developers require some time once the project is completed to sell down their properties and will seek for some funding support over this period.

What is Residual Stock Lending?

In simple terms residual stock lending is a loan taken out against the remaining unsold units in a development. It is designed for property developers who have completed a project but not managed to sell all the dwellings.

With units unsold, this can leave a large financial hole for the developers as, whilst they may generate some income from renting the units, it will be materially lower than the amount they would garner from sales. Despite this they may still have a loan commitment as well as other business costs.

A residual stock loan can just be a refinance of the remaining debt on the development on better terms or even an increase in the lending to provide funds for another project and release some of the profits early.

How does residual stock lending work?

A residual stock loan is normally a short-term loan (6 – 24 months) that is secured against the remaining units (stock) in a development. It is designed to take the pressure off the developer providing time to market and find buyers at the right price for the remaining properties.

Residual stock lending normally will involve refinancing your existing development debt which carries a higher rate to a residual stock loan at a lower rate and can often be with a different lender who specialises in that space.

Residual stock lending is available up to a 70% LVR, however, the more highly leveraged the fewer lenders that will entertain the funding and the higher the cost. If you can get the LVR close to or under 50% then normally you are able to attract finance at a rate sub 10%. If you are closer to 70% then the cost of the debt will normally be closer to 15 – 16% including fees.

Other things like location and quality of the stock will inform lenders appetite and pricing.

Benefits of a residual stock loan

The primary benefits to residual stock lending is twofold. Firstly, it provides breathing space for the developer to find buyers at a fair price rather than rushing to let go of the properties and therefore trading margin.

Secondly, residual stock lending tends to be better priced than development debt and therefore can be a cheaper alternative to extending your development loan.

Other benefits may be an increase in leverage to draw cash out for other group costs or needs like site acquisitions, consenting or working capital.

If you are near completion of a development and need some time to sell down your stock, reach out today!

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