Most property development projects carry a significant portion of construction debt funding which must be repaid on completion. For residential projects such as townhouses and land subdivisions, this typically means selling enough units to cover the construction debt. If the developer does not have sufficient sales at completion then they must refinance the balance. This is where a residual stock loan can help.

Residual stock loans are commonly used by property developers to maximise their return on investment from a completed project with unsold units. It may be difficult to sell the remaining stock, particularly during a market downturn, which means the developer will need more time before they can settle the balance of the construction loan. Rather than compromising on sales prices, developers can choose to hold some of their stock to sell when market conditions are more favourable.

With residual stock finance, the development loan is refinanced against the unsold units and repaid over the next 6-12 months. Residual stock loans are essentially a cost-saving exercise by paying out the higher interest rate construction finance and introducing a lower rate residual loan. Because it is completed product, there is no construction risk with residual stock loans so interest rates are significantly lower.

Even if there are sufficient sales to repay the construction debt at completion, the developer may want to raise funds against their equity in the remaining stock in order to reinvest it into their next project. Residual stock loans can also provide developers with working capital which can then be used for other projects they have in the pipeline, such as purchasing their next development site.

We can arrange short-term bridging loans which provide the developer with sufficient time to undertake an orderly sell down of their residual stock. This will ensure they are not rushed by a construction lender needing to be repaid and enables them to maintain and potentially improve the capital value of the stock.

This type of residual stock loan can be set up separately for each unit, rather than a large facility covering all residual stock. As each unit is sold, that particular facility is settled and closed. Bridging loans are more expensive due to the shorter period, but there are no early payout penalties and the facility allows the developer to retain some of the proceeds from each sale rather than waiting until the lender is repaid.

If the developer intends to retain the residual stock for a long-term investment period (more than 5 years) we can arrange a residual stock loan at a relatively low cost of funds. Reasons for this strategy might include no GST liability or no sales commissions on those units. This allows the developer to access their equity currently locked up in the completed project to reinvest into their next development.

The term and gearing of residual stock loans are directly related to the cost of the facility and there are many variations on these strategies. HCP’s development finance professionals can assess your project and structure a custom solution to satisfy your requirements for a residual stock loan.