For local buyers, property development finance This guide covers how the funding stack is assembled across a development project, from land acquisition through to completion and sell-down, and explains when different layers of the capital stack become relevant.
Property Development Finance Explained
Property development finance is a broad funding strategy that spans the full project lifecycle: land acquisition, construction, and the costs incurred through to completion. Unlike a single residential mortgage, development funding is structured around the project's feasibility and exit, not personal income serviceability.
The funding may take several forms depending on where the project sits in its lifecycle. A land acquisition may be funded through a caveat loan or bridging facility. The construction phase draws down the senior facility in progress stages. Once practical completion is reached, a residual stock loan can refinance unsold dwellings and release the equity tied up in finished stock.
Understanding how construction loans in Australia sit within this broader stack is useful context: the construction facility is the senior tranche, and other instruments layer around or beneath it depending on the project's leverage requirements.
The Capital Stack: Senior, Mezzanine and Preferred Equity
A development project that needs to minimise the equity contribution may layer the capital stack beyond a single senior facility. Mezzanine finance is a subordinated layer of debt that sits behind the senior lender and ahead of equity. Preferred equity sits in a similar position in the stack but is structured as equity rather than debt, with a priority return to the preferred investor before ordinary equity participates.
Not every project needs a layered stack. A project with strong presales and modest leverage requirements may be funded entirely through a senior construction facility. A higher-leverage project where the developer wants to preserve equity is more likely to require mezzanine or preferred equity behind the senior tranche. The total cost of capital across all layers needs to be weighed against the return on equity the project generates.
For a detailed explanation of how the senior facility itself operates, the guide to construction loans in Australia covers gearing metrics, progress draw structure and presale requirements in depth.
How Lenders Assess a Development Proposal
Lenders assess a development proposal primarily on feasibility and exit. The two gearing metrics applied are the loan to total development cost and the loan to value against the gross realisable value. Tracking both gives a clearer picture of whether the project stacks up than a single snapshot ratio.
The strength of the exit is as important as the raw numbers. Lenders want to understand how the facility is repaid: whether through presales settling at completion, a refinance to a residual stock facility, or a bulk sale to an investor. The realism of the timeline relative to the build program is also weighed. A project that cannot demonstrate a clear and achievable exit will face difficulty with most lenders regardless of the gearing profile.
Other variables include the level of presale cover, the builder's track record, and the structure of the project entity. Each of these shifts the pricing and leverage available, rather than following a fixed schedule.
When Non-Bank Lenders Are the Right Fit
Major banks apply conservative policy on presale requirements and leverage. When a project falls outside those parameters, non-bank lenders assess the deal on its merits. Common situations include higher leverage than bank policy allows, presale cover below the threshold a bank requires, a tighter settlement timeline than a major bank can accommodate, or a non-standard project structure where the numbers support the deal but it does not fit a standard credit template.
Non-bank lenders weigh feasibility and exit more holistically, which can open options that remain closed under mainstream bank policy. The trade-off is that pricing reflects the higher risk tolerance the lender accepts. The relevant question is whether return on equity on that specific deal justifies the cost of capital at the leverage level required.
Non-bank development funding is available across residential, commercial, industrial and specialised asset classes, including childcare and rural projects where standard bank appetite is limited.
Who This Type of Funding Applies To
Property development finance is business-purpose, commercial lending. It applies to residential developers building townhouse projects, apartment towers or land subdivisions; commercial developers funding retail, office, hotel or short-stay projects; industrial developers where tenant demand supports feasibility; and builders carrying their own development risk. Developers refinancing into a residual stock facility after practical completion are also within scope.
This type of funding does not apply to owner-occupied home construction or consumer credit. The ASIC Moneysmart home loans guide covers residential construction lending for consumers. Commercial development finance is assessed on the project, not on personal income.
Structuring the Right Facility for Your Project
The right facility structure depends on where the project sits in the leverage and presale spectrum. A project with modest leverage and strong presale cover may need only a senior construction facility with interest capitalised through the build. A project seeking higher leverage or with limited presale cover may require a layered structure where mezzanine debt or preferred equity sits behind the senior tranche.
The goal is a structure that protects equity and supports the return on equity target, not simply the lowest headline rate. A facility that is mispriced for the risk, or that does not match the project's actual timeline and exit, can cost more than a higher-rate facility that is correctly structured. Engaging a broker or adviser who understands the non-bank development lending market is often the most direct path to identifying which lenders and structures suit a given project.
- Prepare a development feasibility summary. Document the total development cost, the gross realisable value, the presale position, the builder, and the proposed exit. Lenders assess feasibility and exit as the primary criteria, so having these numbers ready accelerates the assessment process.
- Identify the leverage requirement. Determine whether the project can be funded through a single senior facility or whether the leverage required means a layered stack is needed. Higher leverage typically requires non-bank lenders and may involve mezzanine or preferred equity behind the senior tranche.
- Assess the exit strategy. Be clear on how the facility is repaid: presales settling at completion, a refinance to a residual stock loan, or a bulk sale. The timeline for each option needs to be realistic relative to the build program.
- Engage the appropriate lender type. If the project fits within standard bank policy on presales and leverage, a major bank may be suitable. If it falls outside those parameters, non-bank lenders assess the deal on its merits and can consider higher leverage and lower presale cover.
- Structure interest and drawdown correctly. Construction facilities release funds in progress draws as build milestones are reached and verified. Interest is commonly capitalised within the facility through the construction period and settled at completion, which reduces cash-flow pressure during the build.
| Phase | Typical instrument | Purpose |
|---|---|---|
| Land acquisition | Caveat loan or bridging finance | Short-term capital to secure the site before construction funding is in place |
| Construction | Senior construction facility | Progress draws released against build milestones, interest commonly capitalised |
| Higher-leverage projects | Mezzanine finance or preferred equity | Subordinated capital behind the senior lender to lift total leverage |
| Post-completion | Residual stock loan | Refinances unsold completed dwellings, releases equity in finished stock |
This guide covers commercial and business-purpose property development finance only. It does not cover owner-occupied home construction or consumer credit products.