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Recent changes in the property development finance market has led to a rapid upsurge in the number of property developers moving to non-bank lenders. Due to significant regulatory pressures, banks such as the Westpac & CBA have opted to slow their construction loan books and thus creating an imbalance forcing property developers to seek alternatives. The vacuum created by banks in development lending is a direct consequence of regulator concerns about rising property prices, an increased prevalence in property speculation and record household debt. An additional measure taken by the government has been to reduce the number of properties being sold to all foreigners but predominantly Chinese. Statistics have shown that large numbers of properties constructed have been sold offshore buyers, which is purported to have significantly contributed to rising prices.
The crackdown on lending is geared towards slowing down the growth of the property. The stringent lending parameters being placed on construction loans by most major banks include 110 - 120% debt cover by presales and additionally places minimum levels of experience for the developers. Almost all developers have been affected by the moves; even some of the largest groups are finding it difficult to comprehend why their bank relationship has changed so dramatically. China has also enforced strict measures on the amount of funds going abroad particularly to Australia, which has left some group without access to capital. As a result, many Chinese developers have had a challenging time trying to salvage their investments.
The withdrawal of banks is as a result of the fundamental shift in regulations that have taken place in response to the overheated property market. The atmosphere has changed from a risk-management regime to a zero tolerance, 100% compliance regime. Now banks only approve ‘perfect’ projects, and ‘not good enough’ loans have needed to find capital elsewhere, this has created an opportunity for non-bank institutions that are significantly less regulated than banks.
The number of property and construction loans funded by non-bank lenders has risen significantly to fill the void created by ADI’s in the property and construction finance market. Whilst overall lending to the property development sector has slowed over the last few months, the industry continues to move forward and had the private lending sector not stepped up a significant number of property developers would have failed.
Brokers that specialise in the non-bank sector such as Simplicity Loans & Advisory, Chifley Securities and Stamford Capital have seen huge increases in enquiries for private solutions. They are having significant success with projects that even 18 months ago would have been comfortably written with one of the major banks.
“We specialize in projects with minimal presales, any type of build and hold, residual stock or just developers that aren’t willing to jump through the hoops required by major bank lenders”says Director of Simplicity Loans Matthew Johnson. “There is a large amount of liquidity in the private finance market, an experienced debt advisor knows how to structure and source funding” he adds.
It is vital for any broker, property developer or client to observe market trends before making or recommending any solutions. Flexibility in lending is critical and developers must take time to evaluate and analyse proper lending sources before committing to project. Without the private sector solution helping the industry prices would have undoubtedly corrected much more severely.
Written by Jean-Pierre Gortan