Definition
What is Development Finance?
Debt funding for the construction phase of a property development — typically structured as drawdown facilities released against construction milestones.
Development finance is the specialised debt used to fund property development — residential subdivision, multi-unit residential, commercial construction, mixed-use projects. The lending is structured around the construction lifecycle.
Typical structure: - Land acquisition tranche — funds the initial land purchase, often at 60-70% LVR of land value. - Construction drawdown — funds released in tranches against quantity-surveyor-verified construction progress. The borrower draws as work completes; the lender retains a margin for liens. - Pre-sales requirement — most development loans require pre-sales of the underlying units before construction draws are released. Pre-sales depths of 50-80% are typical. - Repayment at completion / pre-sale settlement — the loan repays as completed units settle to pre-sale buyers, with any residual paid from refinancing or sale.
Return profile: development finance typically targets 12-18% per annum (gross). The higher rate vs core first-mortgage reflects the higher risk: construction risk, market risk, pre-sale failure risk, contractor insolvency risk.
Risk hierarchy: - Construction risk — cost overruns, contractor insolvency, materials shortage, weather delays. - Market risk — property value at completion may be lower than projected. - Pre-sales risk — pre-sale buyers may walk away if market conditions weaken before settlement. - Financing risk — lender requirements may change; second-tier facilities may be unavailable. - Regulatory risk — consent delays, building code amendments.
NZ wholesale providers: development finance is a specialist segment with managers focused on it (Pallas High Yield Mortgage Fund, MyFarm property funds, Goldsmith Tourism NZ LP). Mainstream banks dropped much of their development-finance book through 2018-2022 in response to capital requirements; the wholesale-private-credit segment grew to fill the gap.
Disclosure: developer-backed funds publishing in NZ are subject to Schedule 1 FMCA wholesale-investor requirements when offering to wholesale investors, with development-specific risks called out prominently in the IM.
Related Terms
Bridge Finance
Short-term debt (3-24 months) used to fund a property purchase or development phase before long-term debt or sale proceeds are available.
Senior Secured Debt
Loans ranking first in priority for repayment in a default scenario and secured by specific collateral, typically with the lowest yields in the credit stack.
Private Credit
Non-bank lending to businesses and property developers, offering regular income and typically secured positions.
Mezzanine Debt
Subordinated debt ranking behind senior debt but ahead of equity — higher returns (typically 10-15%) compensating for higher risk and weaker security.
Educational Content Disclaimer
This glossary provides general educational information only and does not constitute financial, legal, or tax advice. Definitions and explanations are simplified for educational purposes and may not cover all aspects or nuances of each term.
Before making any investment decision, you should seek independent advice from appropriately qualified professionals. Wholesale Investor does not recommend or endorse any particular investment, strategy, or fund manager.