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Current Real Estate Development Cycle Shows More Maturity | Part I
From a developer's point of view, in the previous cycle the land of acquisition could be performed by using financing at a loan-to-value as high as 80%. In today's market most of the land acquisition is performed with developer's equity, bringing down the leverage in the system substantially. In the past, developers were required by lenders to achieve 50% pre-selling requirements to obtain a construction loan. Today's lending environment, not only requires the developer to achieve higher pre-selling requirements, but also to achieve large amounts of buyers deposits, in addition to use the land and improvements as part of a collateral loan. In general terms, the development financing that represented in most cases over 80% of the development cost in the past, is now at a ratio as low as 30%-35%.
From the buyer's perspective, the total deposit amount required to buy a condominium unit was as low as 20%. Nowadays, buyer's deposits required for the acquisition of a condominium unit are much higher; the new deposit norm being 50%, payable in installments during the life span of construction. Furthermore, in the previous cycle, banks were lending up to 80% of the appraisal value, or the acquisition cost, whichever was less, to foreign nationals. Today banks are a lot more stringent and only allow a loan-to-value up to 65% for foreign nationals. In addition, bank regulations have been greatly improved after 2008-2010 financial crisis, leading to a stricter underwriting process. Lenders today are looking to better understand the borrower's source of funds, source of income, financial position, etc. For example, NINJA loans (no income – no job – no assets) do not exists any longer.
If we combine developer's equity and buyer's deposits in comparison with bank financing over the total sellout of the project, between previous and current real estate development cycle ratios, it is easy to understand that a strong deleveraging of the industry took place, allowing for a much healthier long-term equilibrium between the supply and demand. These differences have created a much more stable real estate development environment.
This new development model, based on a higher buyer deposit, has the objective to fund a substantial part of the construction and is only feasible in South Florida for two main reasons. First, local regulations allow the use of deposits to pay for construction, with the exception of the initial 10% deposit that shall remain in escrow at all times (for insurance this could not take place in NY). Secondly, the origin of the demand is focused on foreign nationals. The large amount of international buyers, especially from Latin America, makes it easy to market units with this new system because in most Latin American markets, the lack of bank financing for construction has led to local development models, where the only way to build new projects is by using buyer's deposits payable in installments during construction. Thus, this model is not easily exported to other regions in the United States.
For purely a quantitative point of view in this Miami real estate development cycle the total amount of units built is much lower, but also, and perhaps more importantly, the total amount of units delivered per year is a lot more spread out overtime, allowing for a much better absorption rate in the marketplace. For instance, in the last Integra Realty Resources research report for the Downtown Development Authority, 10,111 units were delivered in 2008, while in this current cycle, the maximum amount of units delivered in a single year (out of 5) in this area amounts to 4,077 units, estimated to be completed in 2017 in the Downtown/Brickell area. This means that we are at 35% to 40% at current high point of delivery compared to previous numbers.
YuliyaKachko Group with ONE Sotheby's International Realty focuses on the luxury condos and sale in the markets such as Miami Beach real estate for sale, South Beach real estate for sale, Surfside real estate for sale, BalHarbour real estate for sale, Sunny Isles Beach real estate for sale, Golden Beach FL real estate for sale, Aventura real estate for sale. For more local markets news please read our Miami real estate blog.
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