Presales and LVR: how a development loan actually gets approved

Ask around about residential development finance and you will be told, with confidence, that the banks require presales covering 100 per cent of the debt. It is repeated in guides, in feasibility templates, and by people who have genuinely been through it.

It was never a rule. The regulator said so, in writing, to every bank in the country.

That matters for a practical reason: if you are sizing a feasibility against a requirement that does not exist, you are either walking away from projects that were fundable or budgeting for a sales campaign longer than the one you needed.

The presale rule that was never a rule

Here is the actual chain of events.

In 2016 APRA ran a thematic review of commercial property lending. In March 2017 it wrote to authorised deposit-taking institutions sharing what it had found. On residential development lending specifically, it observed that “some ADIs had tightened underwriting criteria for presales coverage following market concerns with regard to settlement risk. ADIs are now generally requiring qualifying presales equivalent to at least 100 per cent of committed debt.”

Read that as what it is: a description of what banks were doing in 2017.

It was widely read as something else. In February 2025 APRA wrote again, to all ADIs, to correct it: “APRA clarifies that the reference to presales coverage in its March 2017 letter does not represent a minimum requirement or expectation of APRA. It was a reflection of industry practice observed at the time through the thematic review.”

And, so there was no doubt: “While presales do have an important role to play in a sound credit risk management approach, APRA has not set minimum requirements or expectations for presales in these standards and guidance.”

APRA’s actual requirements for credit risk management in this lending sit in the prudential standard APS 220 and its practice guide APG 220 — which require prudent policies and sound credit assessment and approval criteria, and set no presale number at all.

What actually counts as a “qualifying” presale

Presale coverage is measured against committed debt, not against total project cost or total revenue. That is the first thing people get wrong when they compare their numbers to someone else’s.

The second is what “qualifying” excludes. The specifics are lender policy rather than a published rule, but the questions asked are consistent:

• Is the deposit unconditional, and how much is it? A contract that can be walked away from is worth less as security than one that cannot.
• Is the buyer at arm’s length? Sales to related parties, and to the developer’s own entities, are typically discounted or excluded outright.
• How concentrated are the sales? One buyer taking a large share of a building is a concentration risk, not a de-risking event.
• Are the buyers likely to settle? Foreign purchasers, purchasers with finance clauses, and purchasers who bought very early in a long build all attract different treatment.
• Is the deposit held properly? In a solicitor’s or agent’s trust account, on terms the lender can see.

Two projects can have “60 per cent presold” on a spreadsheet and a materially different qualifying number once a credit team applies those filters. If you take one thing from this section: ask each lender how it calculates the qualifying figure before you assume your own number travels.

The three ceilings, and why the smallest one wins

A development facility is not sized by one ratio. It is sized by several at once, and the binding constraint is whichever produces the smallest loan.

Cost to complete is the one that decides whether a project in trouble stays funded. A lender’s central question at every drawdown is not “how much equity is in this” but “if I stop lending today, can this building be finished with the money that is left”. A facility can be comfortably inside its value and cost ratios and still fail that test after a large variation.

The percentage bands attached to each of these are lender credit policy. They vary by lender, by project type, by location and by cycle, no lender publishes them, and any specific number you read in a guide is a snapshot of somebody’s policy at some unstated date. Get them from the lenders you are actually talking to, not from an article — this one included.

How the money actually comes out

Development finance is not advanced at settlement. It is drawn in stages against work that has been done, and the mechanics change the interest cost enough to matter in a feasibility.

The usual sequence:

1. Land drawdown at settlement, often the only lump sum in the facility, and usually the smallest share of the total.
2. A quantity surveyor’s initial report before construction, confirming the contract sum, the programme and the contingency are adequate for what is drawn.
3. Progress claims from the builder, month by month, certified by that quantity surveyor.
4. The lender funds the certified claim, less retention, into the builder’s account or against the claim.
5. Interest capitalises on what has actually been drawn — not on the facility limit.
6. Repayment from settlements as purchasers complete, usually with a partial discharge for each lot on an agreed schedule.

Two consequences fall out of that. The first is that a longer build costs more in interest but the cost is back-ended, because the balance is small for the first third of the programme. The second is that the quantity surveyor is not a formality — they are the lender’s eyes, and a project whose claims stop matching the programme is a project whose facility gets reviewed.

Where mezzanine and private credit fit

If the senior facility does not reach the required amount, the gap is filled with equity or with something behind the senior lender.

Mezzanine debt sits behind the senior debt in priority. It costs materially more, because it is repaid last and takes the first loss. It is usually documented alongside a deed of priority the senior lender has to agree to, which means the senior lender effectively gets a say in whether it happens at all.

Private credit has become the larger part of this conversation. The scale is worth keeping in perspective: the Reserve Bank’s March 2026 Financial Stability Review notes that non-bank lenders “still only account for 6 per cent of financial system assets”, and that private credit “remains a small part of the overall financial system, accounting for less than 2 per cent of assets in the financial system”. It is significant in development finance specifically, not in the system generally.

ASIC has been examining this market closely, publishing a review of private credit in Australia in 2025. That is worth knowing as a borrower for one reason: a fund’s own governance, valuation practice and conflict management are a real variable in whether it is still funding your project in eighteen months.

The practical questions to ask any second lender are unglamorous. Who is the money behind you? What is your process if the senior lender calls a review? What happens at the end of the term if settlements are slower than the feasibility assumed?

An illustrative drawdown

The numbers below are round, hypothetical and chosen to show the mechanics. The ratios are assumptions in this scenario, not market norms — no lender’s credit policy is being described, and nothing here is an indication of what any lender would offer.

Say a developer has a site for eighteen townhouses. In this scenario:

• Total development cost is $12,000,000, of which land is $3,000,000 and the build contract is $7,500,000.
• Gross realisation is $16,000,000 before selling costs.
• The developer contributes $3,600,000 of equity, mostly as the land, and the senior facility in this scenario is $8,400,000.
• The lender in this scenario requires qualifying presales covering a set share of committed debt before construction can start.

At land settlement the facility draws the land component. The balance sits undrawn while the developer completes presales, finalises the builder’s contract and gets the quantity surveyor’s initial report. Interest accrues only on what has been drawn — for the first several months that is a fraction of the limit, which is why the feasibility’s finance line is much smaller than “facility multiplied by rate multiplied by term” would suggest.

Once construction starts, the builder claims monthly, the quantity surveyor certifies each claim, and the lender funds it. Cost to complete is retested every time. A $400,000 variation halfway through does not just raise the cost — it has to be funded, and if the facility is fully committed, that money comes from the developer.

As townhouses settle, each discharge repays an agreed amount, and the facility winds down. The last few settlements repay the residual, which is where a slow sales campaign becomes an extension conversation rather than a cash-flow one.

What lenders are being discerning about now

The easing in presale requirements is real but narrow, and it comes with a corresponding tightening elsewhere.

The RBA’s March 2026 review records that the most notable easing in non-bank lending standards “is reported to have been for property developers, including less stringent presales requirements and some reduced collateral requirements”, while noting the easing “appears to have been modest”. Its chapter on businesses says the same from the other direction: some lenders “have loosened loan covenants, or lowered presale requirements for residential developments, although other terms generally remain unchanged”.

And then the part that tells you what to prepare: lenders are “instead more discerning on project fundamentals (including location) and by engaging with trusted builders and developers”.

That is the current trade. Less presale coverage, more scrutiny of who is building it, where, and whether you have finished one before.

What to have ready

For a first conversation, in rough order of how often it is the missing piece:

• The feasibility, with the assumptions visible — end values, contract sum, contingency, selling costs, finance costs, programme.
• The builder. Who they are, what they have completed at this scale, their financial position, and whether the contract is fixed price.
• Your track record. Completed projects, at what size, and how they finished. This is the single biggest differentiator between a fundable first-time developer and an unfundable one.
• The sales evidence. Comparable settlements, not comparable listings, and the presale contracts you already hold.
• Planning. The permit, its conditions, and anything outstanding.
• The land. How it was acquired, when, at what price, and what is secured against it now.

If you are sizing a facility or testing a feasibility against real lender appetite, that is exactly the work we do — see how we approach development and construction finance, or book a call and bring the feasibility.