Three Tips For Reducing The Interest Costs On Residual Stock Loans

With apartment sales slowing more developers are being forced to hold onto residual stock. This slows down the cash recycling process leading to potential lost opportunities or in the worst case forced sales.

Whilst there has been much talk of ‘ghost apartment towers’ In Sydney. The reality of is that there are very few developers who can afford to have towers sitting vacant.

One method being utilised by a number of developers in Sydney is taking their existing stock and sending it to market as an asset to lease. This provides the developer with significant cash benefits that can be utilised to fund at least a portion of the interest cost from the loan (as opposed to capitalising the full interest). This provides more time to sell down stock when market prices recover, or to hold the stock for a number of years and build a long-term asset.

The biggest headache for a developer looking to utilise their assets is the difficulty associated with running this stock. In general, a property developers expertise tends to reside in finding land and building, not in managing retail clients and their day to day affairs plus the myriad of legal considerations and obligations that come with management of properties.

In order to maximise the value of the asset the apartments must be occupied for as high a period as possible. Every 30 days an apartment is empty (before your funding costs) is worth 8.3% of the apartments cashflow. Given vacancies in many Sydney suburbs are approaching 45 days that works out to around 12% of the value of that properties cashflow per annum.

As a result, even a days slip can make a large difference to the interest you are paying.

To reduce your interest cost by as much as possible:

Lease apartments as soon as possible after completion. Be active in managing your vacancy risk (or outsource if this is not your core function). If you can – source a guarantee for your properties cashflow preferably one that has a zero vacancies element.

Certainty Property work with a number of developers to provide zero vacancy management that guarantees their cashflow on whole blocks or scattered lots across numerous developments. If you would like to know more visit us at www.certaintyproperty.com.au