Lombard’s Property Development Guarantees2nd Apr 2019
Lombard Insurance has close on 30 years’ experience in delivering guarantees across multiple industries. Our difference is in understanding the nuances of different markets, the client- and beneficiary-specific requirements, the related situational risk, and – with this insight – structuring a guarantee to best suit your need.
By looking at where there is a unique need, we’ve identified where we can make a difference through our product offering and way of doing business.
One of Lombard’s latest ventures is into the world of property with our new Property Development Guarantee.
A challenge often faced by residential developers is the inability to secure the required number of approved sales to release project financing.
‘In many instances buyers, despite being asset-rich with capital tied up in long-term investments, are unable to get traditional bond approval,’ says Alan Beesley of Gap Capital. ‘For financiers, this often counts as a “no sale”, which reduces the developer’s chance of receiving the cash required to start building a new development.’
Lombard’s Property Development Guarantee aims to provide guarantees to qualifying buyers by assessing their assets rather than their income, thereby solving the problem of ‘inaccessible’ capital for both buyers and developers.
‘The approval of a traditional bank guarantee (which, in this instance, would translate into the buyer’s being granted a bond) relies on the buyer’s income,’ says Lombard’s Sarah Wright. ‘In many cases, the buyer doesn’t have an income that would qualify them for a bond for the full purchase price of the property. Rather, these buyers are relying on the sale of their existing home, or liquidation of some other asset such as shares, to fund the purchase of their new home.’
In the case of an off-plan purchase, the time between signing the purchase agreement and actual transfer can be as long as two years; but the developer needs the confirmed sales upfront before building can commence, so the developer is often left in an untenable situation – plenty of qualifying buyers, but not enough qualifying sales.
Using our guarantee product to secure the balance of payment after the required deposit is paid means a buyer doesn’t have to sell off any assets until the transfer of their new home – and the developer gets to count the transaction under guarantee as a qualifying sale to help meet the financier’s quota.
Wright says a lot can happen in two years:
Take a retired couple, for example. Chances are their income alone won’t qualify them for a bond to buy a new home in a development. Their plan is most likely to use the proceeds of the sale of their current property to pay for their new home. In a new development, this situation is generally not enough for a financier to regard it as a qualifying sale. So the couple would either have to sell their current property and find somewhere else to live while their new home is being built, or liquidate some other asset to secure the full payment upfront.
Neither of these options is particularly attractive to the couple, and this is where the Lombard Property Development Guarantee comes in. We are able to issue a guarantee to the developer based on the couple’s assets – their current property, share portfolio or some other qualifying asset – that will ensure full payment at the time property is transferred.
If, for some reason, the buyer is left in a position where they are unable to pay the full amount on transfer, the developer will cancel the purchase agreement with the buyer and submit a claim to Lombard.
The new retirement development at Shoreline Sibaya is proving to be a success story for the Lombard Property Development Guarantee.
Beesley says Gap Capital’s partnership with Lombard has already yielded great results.
‘We have a number of guarantees in place for our development at Shoreline Sibaya, which helped us enormously in getting the project off the ground,’ he says. ‘It has also proven very helpful to buyers, many of whom would not have been able to buy in without a Lombard Property Development Guarantee.’
Lombard Insurance Company Limited – experts in construction, logistics, fuel, mining and energy guarantees, as well as insurance solutions in trade credit and through our partner underwriting managers.