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Featured Image: De Plattekloof
Residential developments can cost millions of rands to build. But raising the money can be a challenge, especially when it comes to pitching the concept to prospective lenders.
However, securing a construction loan is not an insurmountable task. Here we speak to Old Mutual Alternative Investments (OMAI) and Santam to find out how developers can convince investors to buy in.
1. Location, location, location
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OMAI, which has recently backed the development of sectional title development De Plattekloof and assisted living apartments Amber Glades in Howick, says the location should be one of the first considerations and the development must make sense.
It may, for instance, be a hard sell to convince investors to invest in a retirement block in the heart of Karoo where there’s no adequate transport links and hospitals.
‘It is essential that developers exhibit a deep understanding of the complexities. For example, if they’re building a retirement complex, they need show they understand the senior living community for retirement developments,’ says Greg Coe, head of retirement accommodation investments at OMAI.
2. Show your resilience and long-term vision
You need to be able to demonstrate your expertise and knowledge of the type of development you intend to create.
If you’re new to the game, it’s essential to have a good plan – one that can be followed through to the end.
‘For a development to succeed, the developer’s view and co-investment must extend well beyond the development phase. The upfront planning of the offering and the developer’s vested interest in the sustainable long-term management of the operations and services post-development need to be demonstrated,’ points out Ian Mason, head of rental housing investments at OMAI.
3. Consider including an equity guarantee note in your proposal
While you may be able to raise the bulk of the money yourself there may be a funding shortfall. This is where an equity guarantee could help to convince more lenders (or your current lender) to stump up the extra cash.
Santam claims to be the only provider in South Africa to offer an equity guarantee product. It’s a type of insurance, which guarantees the equity contribution (or a portion thereof) and was launched in 2017. Santam has funded a variety of large developments in the Western Cape, KZN and a few in Gauteng.
Ensure that you meet Santam’s minimum criteria before you approach them. For example, they tend to offer minimum guarantees of projects over R10 million.
Karl Bishop, head of Santam specialist real estate, says: ‘It’s a very bespoke product and doesn’t fit every situation. We look at it on a deal-by-deal basis.’
4. Consider bringing on board an experienced partner
New developers can also apply for guarantees but Santam, for instance, prefers to work with partners where they have an established relationship.
If you don’t know of anyone you can partner with, this is not the end of the road. Bishop adds: ‘If it’s as new kid on the block we would generally recommend that they get in touch with someone with experience before they approach us.
‘We have those relationships though so that’s not a problem we can put them in touch with the people we’ve worked with before. The lending environment is difficult, and banks are not taking chances on new borrowers.’
If your track record isn’t long enough you may be considered a higher risk and would therefore have to pay more.
“We do charge a higher premium based on the risk. It’s based on the assessment of the environment the project, track record of the developer, the riskier the triggers or length of the guarantee – the higher the price,” explains Bishop.
5. Don’t sugar coat the pitch
Engaging openly and honestly and not sugar coating the proposal is important says OMAI. After all, no development is without risk. Conveying this risk may sound counter-intuitive but it’s not going to put investors off.
Mason says: ‘Instead, identify the possible challenges and how the risk can be mitigated. This demonstrates authenticity and a willingness to co-operate with investors. Be prepared to listen to investors’ concerns and evolving solutions together.’
Make sure you have skin in the game too. Coe adds: ‘This demonstrates a strong belief and commitment to the proposal. Demonstrate that there is a margin for error built into the feasibility and a good return available for the investor.’
