Residual stock strategies for developers

The completion squeeze

Every developer hopes to complete a project with every unit sold and settling on time. Reality is often messier. Some off-the-plan buyers cannot settle because their valuations come in low or their finance falls through. Sales slow during construction. Completion lands in a quiet season. The construction lender, meanwhile, expects to be repaid, and its default terms can eat into margin quickly.

The developer is left with residual stock and a decision to make.

Option one: discount and clear

Cutting prices can clear stock quickly and repay the construction lender. The cost is margin, and sometimes reputation: heavy discounts can affect the perceived value of units already sold and future projects. Discounting makes sense when the market is falling, holding costs are high or the developer needs capital immediately.

Option two: hold and sell at market

A residual stock loan repays the construction lender and gives the developer time to sell at sensible prices. Interest is usually capitalised. As each unit settles, an agreed release amount repays part of the loan and that unit’s title is released. This protects margin when the market is stable and the issue is timing.

Option three: lease and hold

Leasing some units can cover holding costs, show buyers the project is lived in and appeal to investors. Leased units can later be sold with tenants or refinanced into investment loans. The trade-off is that some owner-occupier buyers prefer vacant units.

Option four: combine

Many developers use a combination: modest price adjustments on slower lines, a residual stock loan for time, and leasing for a few units.

Reading the market honestly

The hardest part of residual stock planning is admitting what the market is saying. Agents may be optimistic, and the developer is emotionally invested in the original price list. A better approach is to look at recent comparable resales in the same building type and suburb, the number of competing projects completing nearby, enquiry levels over the past few months and how long similar stock has taken to sell. If comparable units are moving at prices below your list, holding firm may simply mean holding longer while finance costs grow.

Ask your selling agent for a written campaign plan with price guidance per line, expected days on market and the marketing spend required. A lender will ask for much the same information, so preparing it early does double duty.

Talking to the construction lender early

Construction lenders rarely like surprises. If it becomes clear several months before practical completion that some pre-sales are at risk, tell them. Some will agree a short extension, a revised repayment schedule or a partial paydown from settled sales while you arrange a residual stock facility. Others will not, but either way you learn your real deadline before default terms apply. Waiting until the loan is overdue removes options and can make a replacement lender more cautious.

Doing the numbers

Illustrative only. Compare the margin lost by discounting with the cost of holding:

• finance costs on a residual stock loan over the expected sell-down period
• strata levies, rates and insurance
• marketing and agent costs
• the time value of capital tied up

If holding costs are clearly less than the margin protected, holding is usually the better decision. Use real figures from your agent and quotes.

Model your residual stock options with a specialist.

Release amounts and GST

Release amounts must account for GST on each sale and selling costs, so the developer has funds to remit GST and pay agents while still reducing the loan. Agree these figures at the outset. Our guide to GST and the margin scheme explains GST on new residential sales.

A credible sell-down plan

Lenders want a plan: how many units per month, at what prices, through which agents and campaigns, with a review point if sales lag. The exit strategy timeline helps set a realistic term.

Illustrative example

Illustrative only. A developer completes twelve townhouses; nine settle and three buyers fail. A residual stock loan repays the construction lender. The developer leases one townhouse, relists the other two with a refreshed campaign and sells them within four months near original prices. The leased townhouse is later sold to an investor with the tenant in place, clearing the loan.

Common mistakes

• waiting until the construction loan has matured
• planning on asking prices rather than achieved prices
• forgetting strata levies and GST in holding calculations
• assuming every pre-sale will settle

What a lender asks for

A residual stock lender will usually want a schedule of every unit or lot with its status, list price and any contract price; copies of exchanged contracts; the occupation certificate or equivalent completion evidence; strata or subdivision plans; a current sales and marketing plan; a summary of holding costs; and the details of the loan being repaid. Some lenders will lend on their own desktop assessment of the stock, while others want a formal valuation for larger facilities. Having this pack ready shortens the process considerably.

Tracking progress after settlement

Once the residual stock loan settles, keep a simple monthly report: units sold, units under contract, release amounts paid, the remaining loan balance and the remaining stock at current list prices. Share it with the lender without being asked. If sales are behind plan, raise it early along with what you are changing, whether that is price, agent or marketing. Lenders are far more flexible with borrowers who keep them informed than with those who go quiet as the maturity date approaches.

Where to start

If you are close to completion with unsold stock, check your eligibility with no credit check. We will ask about the number of units, the sales evidence you hold and when the construction loan falls due, then explain what a residual stock facility might look like.

Holding costs add up quietly

Holding costs are easy to underestimate because each one looks small. Strata levies on every unsold unit, council and water rates, land tax, building insurance, agent retainers, advertising, cleaning and presentation, utilities for display units and finance costs all run every month. Multiply them by the number of unsold units and the expected selling period, then compare the total with the margin you would give away by discounting. Sometimes holding wins comfortably; sometimes a modest price adjustment on two or three slow units is the cheaper path. Running both scenarios side by side, with the exit timeline tool as a starting point, takes the emotion out of the decision.

Partial refinances and investor exits

Not every unit needs to be sold. Some developers keep a few units long term and refinance them into standard investment loans once they are leased and the residual stock facility has been reduced. That approach can work well, but it depends on rental evidence and the developer’s own borrowing capacity. Plan which units you might keep before settlement, so release amounts and the loan structure allow for it.

Plan for completion before you get there

Residual stock is a timing problem that rewards preparation. Tell us about the project, the remaining stock, the construction payout and your sales plan, and a specialist will show you the options. There is no credit check when you first enquire, your details stay within our team, and recent sales in the project help us size the loan correctly. Start your enquiry.