Integrated real estate development insurance

Santam has introduced a seamless insurance solution that’s receiving enthusiastic support from developers and development financiers alike. Karl Bishop highlights the advantages.

There are a number of hurdles and challenges in the long process of bringing specialised developments, like shopping centres, office and industrial developments, hotels, conference centres, schools, hospitals and large-scale residential developments, to successful completion. That’s why developers typically have to take out different insurances to cover construction work, project liabilities and, once buyers or tenants move in, the structures themselves. But that means different policies from different insurers, so who pays for what when a claim arises?

It was to ease the negotiation of some of these hurdles that Santam created its seamless developer-specific insurance, which consists of two complementary products: Real Estate Scheme Development Insurance and the Equity Guarantee for Property Developers.

In essence, the Equity Guarantee for Property Developers provides financiers with the security of knowing that their loans will be backed by insurance against delivery risks, like abnormal cost overruns and non-completion, and that the property will be income-generating at the end of the development period. Real Estate Scheme Development Insurance provides cover against construction risks and partly completed structures, even before final occupation. By combining these products, Santam insures the equity, the construction work and the completed structure, offering developers peace of mind, as well as the benefits of price and a seamless service.

Equity Guarantee for Property Developers

Developers may be able to raise the bulk of the funding they require from their financiers, but they typically have to fund the balance themselves via an equity contribution. The Equity Guarantee for Property Developers guarantees the equity contribution (or a portion thereof). The financier therefore has a development loan backed by A-rated security, which makes it possible for the bank to release a higher level of funding. This, in turn, speeds up the development and releases a significant amount of working capital (cash) for the developer.

This product is attracting enormous enthusiasm in the marketplace. Even the big companies, like listed developers, are buying into it, because it reduces their gearing and frees up their cash, which they can then either distribute to shareholders, use to refurbish existing properties, or use to increase the number of developments they undertake in a year.

Real Estate Scheme Development Insurance

The biggest risk to Santam is the failure of the developer during the construction period as there are always risks like timing and cost overruns. This is why Santam takes a very active role upfront, and why there’s always a three-way conversation – between the developers, the financiers and Santam.

This is also where the Real Estate Scheme Development Insurance product comes in. By covering the risks during the building process, as well as in the period between completion and the time when the scheme is registered and occupation is allowed, Santam guarantees a seamless transition. This is why Santam involves itself in the planning stages of the project, and why it remains part of the process through site visits, progress reports, updates, quantity surveying, etc. Rather than putting pressure on anyone, Santam’s involvement is therefore more of a monitoring role.

And while each transaction is tailored to the particular development and the particular developer, the guarantee will generally remain in force until practical completion, which may not necessarily be achieved at the same time as the project is sold out. As long as the developer has delivered the product on time and on spec, it can start generating income.

Costs, financiers and underwriters

The cost of Santam’s Equity Guarantee for Property Developers depends on the risk. It is typically priced as a percentage of the developer’s equity that is insured by Santam – depending on the developer’s history with the company and other underwriting factors.

Payment can either be made as a once-off, upfront premium, or it can be split between a lower premium and Santam taking a percentage of the project profit.

The kicker with our equity guarantee product is that Sanlam – our majority owner – is also a property development financier, although they generally don’t fund residential projects. Santam only works with reinsurance partners that are A-rated in the international community. This is important for financiers, since it reassures them that the company will always be able to pay in the event of a legitimate claim.

Into the future

Santam is currently also developing a product for the needs of lesser-known and smaller developers. This is significant because of the country’s growing housing needs – especially in the retirement housing market, and at the lower end of the general housing market. A similar insurance product for these sectors will facilitate the supply of housing at these levels.

By underwriting both equity and project risks, this product will increase access to funding for small developers, which will help to create much-needed housing for an as yet undersupplied market.

And that sounds like a win-win situation.