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.
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
Karl Bishop
Head of Santam Specialist Real Estate
T
here 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
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.
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.
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. 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.
Real Estate Scheme Development
Insurance Payment can either be made as a one-off,
upfront premium, or it can be split between a
lower premium and Santam taking a percentage
of the project profit.
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
Santam is an authorised financial services provider (licence number 3416).
Costs, financiers and underwriters
The kicker with our equity guarantee product
is that Sanlam – our majority owner – is also a