Top tips for investing in construction loans – part one

For more than 25 years we’ve provided investors with thousands of opportunities to invest in property construction projects. Despite construction loans comprising 23% of our loan book, we still find some investors shy away from construction investments, often because they aren’t familiar with the construction process. 

Over the next two newsletters our Credit Analyst, Arishma Lata is shedding some light on the in-depth management practices we have in place to ensure construction projects stay on track. In this article Arishma looks at the practices around funding the build. 

Providing construction funds 

Most construction loans we service are on a fixed-price contract. This contract is agreed upon when an adviser first applies for a loan with us. 

We supply funds to the borrower incrementally based on continued construction milestones. We call these Progress Drawdowns (PDDs).  

Once work has been completed, invoices are provided to SCP, and we pay these out when the work is verified. Payment is usually made direct to the service provider but sometimes to the borrower if they have already used their own funds during the project. 

We typically verify work through photographs provided with PDD request along with a council inspection report, a physical site visit, or a drive-by completed by an SCP representative. 

Funds are usually only provided for completed work. There are sometimes exceptions, however these are discussed on a case-by-case basis. 

These construction loans are then added to the portal for investors, along with a description i.e. the fourth progress payment was provided on 22/06/2023 to install windows and doors. 

If you’re invested in a construction loan you can track progress updates through the investor portal. 

Funding the build 

At SCP we are conservative lenders, this means we conduct our due diligence to ensure the building projects we lend on have the best chance of completion. 

Below are just some of the things we look for to make sure the construction project will be completed: 

• Fixed-price contracts. A fixed-price contract from a reputable builder is required in our applications. In this contract we will check the cost to build per m2 is sufficient to complete the specifications provided. We also investigate previous build projects completed by the builder to show style and quality prior to accepting the loan. 
• Contingency amount. We add a 10% contingency amount to the funds requested to allow for any overrun. If any customer variations are required, then those are typically covered by the client themselves. 

• Total loan amount. The total loan amount displayed on the portal is the entire amount SCP will lend to complete the build. As above, this is paid in increments. 
• Valuation.  The loan to value ratio (LVR) is calculated using the value of the fully completed project calculated by a registered valuer. In most cases, we also deduct the GST amount from the end value. 

Before we accept any loans we always ask for a comprehensive application. This includes taking the borrower's situation into account, knowing how they plan to exit the loan, and the LVR they’re looking for. 

With our recent investment in growth areas such as Christchurch we expect to have a regular supply of good quality construction projects to offer investors. All construction loans we are offering are available on the portal, so please touch base with us if you have any questions. 

Be sure to look out for part two of top tips for Investing in construction loans in next month’s newsletter where we look at how we manage these loans.