The National Post says developers have had to adjust to “a new reality where credit is constricted; pre-sales, the lifeblood of the construction boom, are drying up; and buyers, amid forecasts of a 13% drop in housing values next year…are growing too skittish to commit.”
If developers are “adjusting to a new reality,” you can bet that lenders have already adjusted. There’s been some big commercial lenders turn off the tap in recent months for anything but pure “lay-up” deals. Today, if you’re a developer without a significant experience, solid cash in your deal, and/or considerable pre-sales, you’ll find that even private money is much harder to find.
“Canadian banks have become very tight on cash and their lending has dramatically changed,” says Philip Pincus of Platinum Equities. The National Post writes that as many as 70% of Vancouver condo buyers in recent years were speculators, for example. “With credit tightening, some are so over-extended they cannot get mortgages, while others simply no longer want to take on units they committed to at the frothy prices of the past few years.”
That’s making the game a lot tougher says Blair Forster of Harvard Development: “You want the best opportunity to generate pre-sales that will meet your funding requirements and get going. But obviously if you can’t sell any condos, then you can’t get debt.”
Meanwhile, the pre-sale bar is being set higher. Real estate reporter Lori McLeod writes that lenders want 70% pre-sales these days versus 60% “when credit markets were looser.” The Globe says: “there is a flow of rumours about smaller developers who have been turned down for financing even when they had a high level of presales, because lenders are concerned about buyers backing out or costs rising.”
On the other hand, not everyone is hard up for financing. Blue chip deals like Bazis’ $450 million “Bloor 1” project in Toronto are still getting done without too much pain. Developer/Realtor Brad Lamb says, “Any development in the city that has achieved 70% of their pre-sales, and the budget makes sense — in other words, they sold them at a high enough price that protects the bank — banks are lending developers money.”
Even on a smaller scale, Steve Copp of the CHAsays, “if you’ve been in the business a while and you have a good history” with lenders, you “are still OK.”
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