Structured Finance Advice for Developers
The P10 Team is experienced in helping property developers find the right funding solutions and navigate the murky waters.
When advising on Return on Equity (ROE), it is key to understand how the profit is affected in the capital stack. The general consensus is that the overall profit of the scheme reduces as the leverage increases and more funds are borrowed. However, the key is making sure that the ROE position increases. Let’s show you how this works on a live scheme in South London.
Highlight of Numbers:
55 Units
GDV - £22,800,000
Loan Agreed - £15,960,000
Leverage – 70% LTGDV
Margin – 5.29% over Base Rate
Purchase price - £7,400,000
Stamp duty - £359,500
Total Build costs – 9,500,000
Total Development Costs Pre-finance - £17,259,500
Estimated Interest – £1,658,658 (Sales modelled from month 18 at £3,000,000 a month).
Estimated Fees - £319,200
Estimated total finance costs - £1,977,858
Total development costs - £19,237,358
Net day 1 loan - £4,750,000
100% of build facility funded - £9,500,000
Equity requirement - £2,650,000 + Stamp £359,500 = £3,009,500
Profit After All Costs - £3,562,642
Profit on cost – 18.5%
Return On Equity – 118%
Understanding Numbers
As you can see in this scheme above an 18.5% return on cost does not deliver the greatest returns given the work involved in delivering a 55-unit scheme. But when you look at the return on equity metric then this makes the numbers look a lot more appealing.
Property development is never easy—if it were, everyone would be doing it. But with the right professional team in place, a bit of foresight, and you can build a desirable product, the stars can align. Just make sure your finance team is as sharp as your architect. Delivering the correct numbers on your scheme is key to making developments successful.