How developers face a changing property and finance market: HoldenCAPITAL

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The current Australian residential property market over recent years has gone from strength to strength.

With interest rates at one of the lowest points in Australia’s history, our current low currency rate attracting overseas investment into Australian property and limited supply levels in many capitals post the GFC, this has lead to a property market ranging from solid in some locations such as Brisbane to booming in areas such as Sydney and parts of Melbourne. 

An indication as to where our construction industry is at can be gained from the number of cranes on our city skylines, currently there are over 647 across Australia’s cities of which 79 percent are residential, 9 percent commercial and 12 percent covering the rest of the sectors.

Accordingly, with the major banks in Australia under strong regulatory pressure as we have previously highlighted, we have now reached a position where they have practically stopped lending on major projects for all but the very best of their institutional and high net worth corporate clients. Most developers are struggling to understand why all of a sudden they are faced with a problem that they can no longer get bank finance on the terms traditionally available.

The reality is that the major banks risk departments are now calling the shots, even though their front office credit department may have approved the project. With thousands of properties currently under construction throughout Australia, particularly in terms of apartments in concentrated locations within the major capitals there is a growing concern within these risk departments as to the level of potential settlement risk.

This in turn is borne out of their concern that many investors will not achieve finance approval for their investment if the oversupply results in their purchase price being “out of the money” as a result of falling values and some cases a two tiered market emanating from these oversupplies.

That said, there are opportunities for developers who have their finger on the pulse of the current changes in market demand for product types and mix and are ready to provide the appropriate supply.

William Arthur Ward said that "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails."

There has also been a strong shift in South East Queensland from an investor market to one which is catering to a growing level of owner occupier demand and the smart developers have already taken this into account in configuring their projects.

Five years ago, the majority of the apartment market was demanding more 1 bedrooms, 60 percent and balance was split roughly between 2’s (20 percent) and 3’s (20 percent). Overtime this moved towards a greater No of 2’s with the 3’s remaining static. Now with the current market turning more towards owner occupiers the mix is more 60 percent 2 bedrooms and 20 percent 1‘s and 20 percent 3’s.

There have been a number of developers who have also targeted their next projects to be boutique and smaller in size, focusing on inner suburban locations but away from the high rise nodes. Some have also diversified to commercial and mixed use, while others have focussed on age care or child care in an attempt to capture a share of a growth sector.

Some developers have even made the switch away from apartments and medium density to townhouse and land subdivisions as the market for this product has shown good positive signs in recent months.

A similar ripple effect has also taken place in the construction finance sector. In the previous year we saw most new projects placed by HoldenCAPITAL with the major banks and around 33 percent set with non-bank lenders. With the major banks effectively shutting their doors on many clients we have seen this balance shift significantly with nearly 66 percent of all transactions settled with the non-bank sector.

We have also seen a rise in the number of developers requiring swift finance solutions to secure sites having acquired the site, obtained their approvals and some even starting early works in an attempt to meet market demand only to be disappointed by their house banks declining the finance. While switching to a non-bank lender comes at a cost (between 2-4 percent in terms of the interest margin), many developers are finding that the time saved not having to secure the high presale commitments required by the banks (100 percent+ of the debt), enables them to start the project far sooner and to take advantage of selling to meet a current demand while constructing.

This massive shift toward non-bank finance is not a short term aberration and clients are finding that in many cases they have been much easier to deal with, require less constrictive terms and conditions and are capable of settling within quite short lead times. If you are finding that dealing with major banks stalling your project it might be time to see a construction finance expert and see what other options are available.

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.