The changing face of brokerage and construction finance: HoldenCAPITAL

The changing face of brokerage and construction finance: HoldenCAPITAL
The changing face of brokerage and construction finance: HoldenCAPITAL

The changing face of brokerage and construction finance: HoldenCAPITAL

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Post the GFC we saw the major banks consolidate their stranglehold on the Australian construction finance sector however, there are changes afoot which will likely see a major restructuring of the status quo.

As we have previously commented on, the additional capital requirements recently imposed on the Australia’s big 4 Banks in order to ensure their compliance with the ongoing BASEL standards is having a significant effect on the construction finance sector and we believe it’s the beginning of a permanent change in how funding will be both obtained but also who provides it.

These overriding regulatory requirements are not temporary responses to a specific event; they actually represent a permanent constraint on the banks which is impacting both their pricing and the terms and conditions being applied.

We have previously discussed how the need to rebalance their capital allocations has resulted in a need for the banks to reduce their exposure to the sector as construction finance requires a significant level of capital reserve allocation and as such is no longer an overly profitable product from their perspective, hence their reduced appetite.

While there is no doubt that as loans run off their book they will look to replenish, the reduced loan to value ratio’s and other more conservative terms and conditions are permanent changes to bank lending policies which will now fluctuate within certain lower risk parameters. we expect that there will be pricing increases albeit competition will keep that to a reasonable level.

So there is likely to be pressure on the banks to satisfy their client base but remain competitive with the competition which will rise from the second tier banks, specialist funds, private lenders and the like.

This represents a new world order in construction finance and has been clearly demonstrated with all four banks being currently either closed for “new to bank” business or operating with significantly reduced appetite and drastically reduced lending parameters.

Having said this, we don’t expect them to give up their market share without something of a fight once their capital positions allow. One major area they can attack is operational costs and there are two fundamental options open to them.

The first is systems and the second is staffing. With the risk assessment process rapidly becoming automated, we are seeing the banks become more and more reliant on data being input into models using cheaper offshore labour for overnight spread sheeting of financials and with loan approval itself becoming more automated utilising more and more specialised risk models, it is only a matter of time before most transactions are approved based on a simple process of relevant data being entered into the model and then “computer says” Approved! If this sounds like an oversimplification, think about how quickly we all adapted to the home loan process undergoing a similar revolution.

Staff are the single largest cost in this process and there is no doubt the banks are looking to manage those costs to their advantage. The other change we are seeing is a greater reliance on brokers to source deals. Again, if look at the housing mortgage market, current estimates are projecting that 60 percent of all new business will be sourced from brokers by the end of this year following the UK trend where it is estimated to be 75 percent.

In the construction finance sector, it is estimated that 16% of new business is broker generated and this is growing rapidly. We are seeing banks reduce their business development teams and actively courting brokers, effectively reducing staff overheads.

As we recently commented, developers can no longer expect their house bank to provide the necessary funding just because “they have always done it in the past”. They may well have had a sound 30+ year relationship with their bank but this does not guarantee their ability to borrow funds on the same terms that they have been used to.

The risk model will determine this as will their brokers ability to ensure that all the facts, good and less so are properly spelled out become key to a good outcome. For this reason, a professional broker who understands the bank requirements as much as those of his client is a key element in the process.

Today’s developer is now seeing an ever increasing number of options as competitors look to move into competition with the banks and other existing funders. The challenge is identifying which ones best fit both their specific project needs and a readjustment of expectations as to what constitutes an appropriate finance cost when assessing project viability as the cost of these funds is generally between 2-3 percent higher.

The challenge for brokers is that to be successful they need to deliver on both sides of the equation. That is, they need to deliver the best possible outcome for their client while ensuring they deliver a professional presentation to the bank/lender which meets their expectations in terms of detail and accuracy. The trust of both parties is key!

So, just as the housing mortgage market completely restructured with the coming of the wholesale funds and brokerage structures, so we expect to see the construction finance industry undergo a similar metamorphosis, ultimately with similar positive results for the end user. We are already seeing the re-emergence of various second tier banks, investment funds, managed trusts and various private lenders all vying for a share of what will continue to be a growingly sophisticated market.

Brokers now provide Australians with the best way to source cheap and competitive housing loans, so your construction finance broker also holds the key to successfully securing competitive construction funding for your next successful property development.

This article was written by Dan Holden of HoldenCAPITAL, who are a bespoke construction finance firm, they arrange construction finance and invest in projects through their equity fund, Queen Street INVEST. To discuss your project finance requirement please call (07) 3171 4200 or visit HoldenCAPITAL here.

Dan Holden

Dan Holden

Dan Holden is Director of HoldenCAPITAL

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Finance Construction

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