Construction Finance with No Pre-Sales - Is it a Good Idea?

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It's 2024, house sales are tough. Selling your development off-the-plans is next to impossible. The only homes being pre-sold at the moment appear to be selling at very low prices, and even then this only represents a small volume of the houses on the market.

Luckily, many Funders have come around to the idea of lending without pre-sales or debt cover. So, you get a as-if complete valuation done for the proposed houses, you get the funding approved, and you get underway with the development.

Was this the right decision to make?

There are a few reasons that people aren't buying off-plan:

1. Uncertainty around where the market is heading.

2. Uncertainty about their pre-approval remaining valid by settlement.

3. Uncertainty around liquidity of the builder/developer.

4. Having a huge amount of options to choose from which are already completed.
   

Selling your development during and after construction solves these issues. However, it also introduces risk.

There are benefits to pre-selling your homes:

1. It validates the product and price point, so you know the project is feasible.

2. Provides debt-cover, meaning that on CCC issuing your debt can be repaid.

3. Insulates you from market changes. If the market is suppressed or worsened by completion, you wont need to discount your homes to sell them.

We're seeing some examples of completed developments that have been sitting empty with no-sales in sight, meaning huge holding costs for developers and eroding any possible profits.

If you're going to develop without pre-sales, we recommend you know your market intimately. The pricing needs to be right to ensure that you achieve a sufficient velocity of sales during and post construction to pay down your debt as soon as possible. We also recommend having a strong confidence in your typology. Ensure it is a proven product that the market demands, otherwise you may be developing houses that completely miss the market and will not be in demand even on completion.

We're managing client projects without pre-sales currently and are also evaluating new projects for ourselves on this basis. This can be a viable strategy, but needs to be executed with caution.