Peer Estate is making available to you a first mortgage investment opportunity secured by a residential townhouse development in Donvale, Victoria.
A construction loan facility of $3.84 million ("Facility") will be provided to assist the Borrower to acquire the site, fund finance costs associated with the Facility, and fund the construction of four detached double-storey four-bedroom townhouses with spacious living areas and double garages ("Project").
The site will be acquired with approved plans and permits for the Project allowing the Sponsor to commence demolition of the existing improvements and building works shortly after settlement.
The Facility is sized with a Loan to Value Ratio ("LVR") of 69% against the 'as if complete' GST exclusive valuation of the Project. The valuation was undertaken by an independent licenced valuer that is familiar with the locality. The Facility Loan to Cost Ratio ("LCR") will be a maximum of 75.2% against the total development cost of the Project.
Please Note: Investors will earn a Line Fee rather than an Interest Rate. Investors will be paid the Line Fee at a rate of 9.0% per annum. The Line Fee is calculated on the Facility Limit and will be paid monthly in advance.
Payments to investors will be comprised of Line Fees only, with capital to be repaid upon maturity.
The Facility has a forecast term of 14 months from the expected settlement date of 19 March 2018. A minimum earn provision will be included in the loan documents which ensures at least 9 months' of Line Fees will be earned on the transaction.
The Sponsor is a private developer and builder with a track record of acquiring sites and developing similar development projects in Melbourne's north-eastern and eastern suburbs. The Project will be undertaken as an owner-builder project. The required equity contribution of $1.265 million from the Borrower will be made upfront and in full at settlement.
The Facility does not have a requirement for any pre-sales to be achieved prior to first drawdown, however, it will require the Borrower to pre-sell at least two townhouses by 31 October 2018. Failure to achieve the required pre-sales will result in a review of the Facility, providing the Lender with a right to amend pricing, structure, terms and other conditions of the Facility.
The Facility is expected to be repaid from a combination of settlement of pre-sold townhouses and refinance of residual debt.
Investors' capital will be called upfront and in full, to be held in an account with the Lender's independent custodian (Perpetual Corporate Trust Limited) and disbursed in line with ongoing monthly construction drawdowns. Progress drawdowns will be assessed by the Lender with reference to the percentage of works complete, as certified by a qualified quantity surveyor appointed by the Lender.
The Facility will be secured by a first ranking mortgage over the property, General Security Deed from the Borrower, and Specific Security Deed over the shares in the Borrower. The Facility will also benefit from personal and corporate guarantees from the Sponsors and a builder side deed.
Key Deal Points
- Line Fee of 9.0% per annum paid monthly in advance and funded by the Facility.
- Well located site with access to established amenity including shopping centres, schools, retail outlets, recreational centres and open space.
- Short distance to major arterial roads and public transport networks.
- LVR of 69% 'as if completed' valuation and LCR of 76% with substantial upfront equity commitment.
- Progressively drawn facility based on certification from a quantity surveyor.
- Requirement for two pre-sales to be achieved by 31 October 2018.
- Contracted for purchase with the benefit of an approved planning permit allowing immediate commencement of building works.
- The Sponsor is a developer/builder with a demonstrated track record of delivering similar projects.
The project site is located at 43 Leslie Street, Donvale, Victoria, and is rectangular in shape with a frontage to Leslie Street only.
The site comprises 1,560sqm of land with an existing residential house which will be demolished to make way for the Project.
The site is surrounded by a mix of established residential homes and townhouses.
The Borrower contracted to purchase the property in November 2017 at a price of $2.3 million.
The site is a short drive away from Westfield Doncaster Shopping Centre, Tunstall Square Shopping Centre, The Pines Shopping Centre as well as other shopping, sporting and recreational facilities.
The site is also in close proximity to a number of schools including Donburn Primary School, Whitefriars College, Donvale Christian College, Mullauna College and East Doncaster Secondary College.
Access to major arterial roads such as Eastlink, Eastern Freeway and Springvale Road, and public transport networks are a short distance from the site.
A valuation has been prepared by an independent licenced valuation firm that is familiar with the locality. The valuation report is addressed to Peer Estate for reliance and dated 06 February 2018.
The valuer has determined the 'as is' market value of the site, 'project related site value' and 'as if complete' value of the Project.
The overall 'as if complete' valuation is $5.89 million (GST inclusive) and $5.56 million (GST exclusive). The individual unit values range between $1.45 million and $1.52 million (GST inclusive).
Townhouses in the Project range in building size from 242sqm to 262sqm and contain four bedrooms, ample living areas, and double garages. Each townhouse has a small outdoor area and verandah.
Fixtures and fittings will be commensurate to the owner-occupier market with timber flooring, stone benchtops, Smeg kitchen appliances, matte black and chrome bathroom and kitchen fixtures, automatic garage door and double-glazed windows.
The townhouses are fully detached and there are no common walls with adjacent lots.
The valuation reflects an average price of $1.47 million (GST inclusive) or $5,919 per square metre of building area. The valuation reflects a premium to the the median house price in Donvale of $1.30 million in December 2017.
The target market comprises downsizers, upgraders from the local area, and families looking to move closer to the city from the outer suburbs.
Construction costs are confirmed, with an executed building contract in place.
Construction is expected to have a duration of approximately 13 months. A buffer of 1 month is in place for unexpected delays and to allow for settlements to occur, resulting in a Facility term of 14 months.
The Project feasibility demonstrates a forecast return on cost of approximately 9.0%. The return on cost is low due primarily to the cost of the Facility, however it does not include the builder's margin that will be received by the Sponsor due to the owner-builder structure. Once accounting for the builder's margin, total return on cost to the Sponsor is estimated to be circa 13.4%.
The Sponsor is a developer/builder with a track record in completing similar development projects and construction of stand-alone luxury homes over the past 8 years. A summary of the Sponsor's recent residential developments is provided as follows, all of which have been undertaken as owner-builder projects:
- Flinders, VIC – 3 townhouses, 2 apartments and 3 shops. Completed July 2010.
- Chadstone, VIC – 4 apartments and 1 shop. Completed October 2015.
- Burwood, VIC – 2 townhouses. Completed December 2015.
- Heathmont, VIC - 11 townhouses. Completed September 2016.
- Heatherton, VIC - 4 townhouses. Completion due March 2018.
- Knoxfield, VIC - 4 townhouses. Completion due June 2018 (currently ahead of schedule).
In addition to the above, the Sponsor has completed three luxury house development/extensions (in Kew and Hawthorn VIC) and two commercial projects (in Brighton and Templestowe VIC).
The Project will be managed by the Sponsor, with a building contract entered into between the Sponsor's builder entity and the Borrower.
The Sponsor is providing personal guarantees in addition to the standard suite of securities. The Sponsors have provided financial information to Peer Estate on a confidential basis and this has been assessed as satisfactory for the purposes of supporting the Facility.
The Borrower is a special purpose vehicle established to develop the Project, and the financials for the Borrower evidence this.
Capital Structure Stack
COUNTERPARTY AND DELIVERY RISK
- That the Sponsor cannot complete the Project.
- The Sponsor has a track record demonstrating the ability to complete similar projects on time and on budget.
- The Sponsor will commit $1.265 million in cash equity to the Project which will provide incentive to complete the Project.
- The Sponsor has purchased the land with planning approval for the Project, mitigating planning risk.
- A contingency is provided within the Facility to cover a level of unforeseen costs.
- The Borrower and Builder are aligned in their interests as they are both wholly owned by the Sponsor.
- The Sponsor has provided personal guarantees for the Facility and is therefore incentivised to complete the Project and repay the Facility.
- The funds will be drawn down progressively and certified by physical progress inspections of the site by an independent quantity surveyor appointed by the Lender.
- The Lender will enter into a builder side deed with the Borrower and builder, providing the Lender with step-in rights in relation to the Project.
VALUATION AND EXIT RISK
- The risk that the Property declines in value due to changes in market conditions or property specific factors resulting in the Lender being unable to exit its position in the Facility.
- The LVR is 69% against the 'as if complete' GST exclusive value of the Project. This is considered an appropriate level of leverage given the location, planning approvals in place and the Sponsor's track record.
- In the current market, it is expected that the completed end product would be able to be refinanced at a 69% LVR to either a major bank or alternative financier.
- There would be high demand in Donvale for the product at a discount of 31% to the valuation that would be required to “breakeven” on the Facility. The gross sales price in a breakeven situation of $1.02 million is well within market parameters for large townhouses and houses in Donvale.
- The Lender will have recourse to the Sponsor via personal guarantees in the event net sales proceeds from the sale of the properties could not fully clear the debt.
Exit of the Facility is expected to be from a combination of the sale of the townhouses and/or refinance. The Facility conditions require the sale of two of the townhouses by 31 October 2018, and failure to achieve this condition will result in a review of the Facility allowing the Lender to amend pricing, structure, terms and other conditions. The Sponsor will engage local real estate agents to market the Project as soon as construction commences.
To assist with the purchase of a development site and construction of the Project in Donvale, Victoria.
19th March 2018
19th May 2019
9.0% p.a. calculated on the Facility Limit and paid monthly in advance.
The Line Fee is a net return to Investors after a 1.5% administration fee and a 1.0% arrangement fee for originating the loan.
- First ranking mortgage over the property;
- First ranking General Security Deed over the Borrower;
- Specific Security Deed over the shares in the Borrower;
- Joint and several guarantees from the Sponsor; and
- Builder side deed between the Borrower, Lender and Builder.
Usual for a facility of this nature including:
- Legal due diligence reports and documentation by a national law firm;
- Satisfactory independent valuation report;
- Satisfactory initial quantity surveyor report;
- Satisfactory insurances for the property and builder in place, noting the interest of the Lender;
- Completion of the Lender's Know Your Customer checks;
- Provision of satisfactory financial and tax information.