Housing construction finance - considerations beyond interest rates Kahumbya Bashige CDir

“What is the interest rate going to be?” is an almost assured question you’ll encounter in a business conversation between property developers and financiers of heavy capital projects.

If you are a property developer (or aspire to be one) or a financier who routinely encounters property developers in search of construction finance, stay with me.

Valuable time is spent negotiating for as little as 50 basis points (0.5%) reduction in the proposed pricing, often leading to hopping from one financier to another. I have seen developers spend as long as one year looking for that magic number (interest rate) that will be music to their ears. Not that it doesn’t matter, but this ignores the larger repercussions of delays in closing on financing agreements, especially the inevitable increase in the cost of construction which in the end surpasses the savings in funding costs.

Oblivious also to most developers is the fact that the cost of funding only constitutes 10-15% of the total project budget. The heavy budget items are construction and infrastructure costs which on average account for 65-75% of the budget.

This being the case then, shouldn’t the key area of focus for property developers be reduction of the construction and infrastructure costs?

Beyond project financing considerations, the following are some important strategies that will substantially have a positive impact on the overall project budget:

1. Entering into a PPP (Private Public Partnership) agreement with the government where the government can provide land, as well as onsite and bulk infrastructure. This arrangement would work very well when it comes to delivering large affordable housing projects.
2. Use of ABTs (Alternative Building Technologies) which would reduce the construction period, hence reducing the costs of construction.
3. Use of local building materials. This also promotes local SMEs and creates homegrown employment.
4. Negotiation with government for tax relief for imported building materials.

Even before the above considerations, it is fundamentally important for developers to carry out a proper housing demand study prior to project design to ensure that they are addressing existing needs in the market.  This will ensure a faster uptake of the completed housing units and consequently the ability to pay back the financing facility within a shorter period. Automatically, this reduces the ultimate cost of the project finance.

Blended finance would also come in very handy in addressing overall funding costs. This is where local currency funding can be sourced and directed towards local budget items such as professional fees, land, and purchase of local materials; while hard currency funding is sourced and directed towards imports. This will help address the disparity of currency mismatch and minimise exchange rate risks since most sales receipts will be in local currency.

Often than not, it is really amazing the important factors to take into consideration in order to maximise the benefits of funding property development. Most definitely, the interest rate is not all that matters.