For the five years to the end of 2007 Australian property developers were spoilt for choice with the simplicity and availability of property development finance. Lenders were aggressively pricing to win deals and presales were not a major precondition or were merely a litmus test to the acceptability of the developer’s price point and market demand rather than the driver of debt clearance upon completion of the project.
Fast forward to 2013 and the lending environment could not be more opposite. Lenders, particularly the major banks, and cash, drive the market. Capital is scarce, lenders are conservative, lending margins have increased, lending approvals take longer and presales are now a crucial prerequisite to pushing forward with any development finance application.
So how does the modern day developer evolve to this environment?
By understanding the key requirements of Lenders such as:
Debt vs. Equity – The ability to structure debt facilities and knowing the vagaries of each lender is a key component to underwriting the success of a finance application. Equally important is which cost items will be acknowledged by the lender and also understanding each lender’s lending idiosyncrasies and parameters, including which lenders will accept mezzanine (second mortgage) finance, offshore sales, apartment sizes etc. Ultimately every developer wants to minimise the risk of nasty surprises during a project and one critical component is a successful finance application so the project can start on time – Balmain’s role is to use its lending expertise to assist its clients in securing credit for their project and to communicate realistic outcomes.
Presales – Identification of the specific presale requirements of each lender is a key component of any successful development finance application. This includes and is not limited to; understanding what percentage of stock will be required to be sold to trigger construction finance; selecting an appropriate sales agent; knowing what is deemed to be acceptable in terms of contract sunset clauses, sales concentration risk, deposit type and amount; understanding FIRB restrictions, settlement risk and lender limitations on stock sold to overseas purchasers and takeout of the residual debt upon completion.
Builder – Selection of the right type of builder and understanding the lenders’ requirements of the builder in terms of the financial requirements, references, tripartite agreements, retentions, experience and builder liquidity is key.
The finance application – There is usually only one opportunity for a development finance application to succeed with any lender and Balmain understands that a comprehensive finance application for the transaction is paramount in achieving a positive outcome. Understanding the rulebooks of each lender and targeting the loan application at lenders with appetite for that type of transaction is a key component of Balmain’s success.
Balmain specialises in structuring loan applications, preparing feasibilities and funding tables, undertaking market competition analysis and detailing the key risks and risk mitigants of transactions. Critically, answering the lenders questions before they are asked is a key component of Balmain’s success in arranging construction finance, particularly in the current credit constrained market.
Paul Cleary is a Partner at Balmain Group, Australia's largest non-bank commercial loan manager.