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Is Your Development Finance Provider Covid-Proof?

The coronavirus pandemic has forced many developers to pause or shelve new projects as lenders tighten their belts due to economic uncertainty.

The latest official figures show building activity for new homes falling to six year lows, and approvals are also down. Major banks have retracted from the commercial property development sector with a view to only servicing existing clients, while non-bank lenders are pulling millions of dollars in loan approvals in sectors affected by Covid-19.

Despite a retreat in property lending, there is still a good range of options on offer for those developers looking to get their projects off the ground in 2020, according to Simplicity Advisory director Jean-Pierre Gortan. If the so-called “second wave” of the coronavirus pandemic continues, Gorton says there are a couple of different outcomes for the industry.

“If it continues and further lockdowns happen, it will undoubtedly mean higher rates and lower availability of capital,” Gortan said.

“More and more borrowers will be turning to specialised independent construction finance brokers for their advice.”

Simplicity is one such firm, a boutique brokerage and property advisory business with offices in Sydney and Brisbane that Gortan says is well-placed to help clients in the construction and development game achieve their personal and financial goals.

Gortan said that despite recent Covid-19 restrictions, some developers are starting to feel like things might actually return to normal sooner rather than later.

And while parts of the non-bank sector share this sense of optimism, the same can’t necessarily be said of ADIs and, in particular, the majors.

“We might actually have the virus under control. Lenders—including some privates—are starting to unfreeze their policies, but we expect the majors to restrict their property lending for at least the next 12 to 18 months.”

“Non-bank lenders are already partly back, higher LVR loans and no pre-sale construction is becoming available again,” Gortan said.

“But it all comes with a caveat—pricing is likely to remain higher for the immediate terms.”

Although Home Builder stimulated construction, recent waning consumer confidence and rising unemployment is affecting construction levels.

The commercial sector is also feeling the pinch with falling valuations and large volumes of office stock hit the market.

“We expect large reductions in commercial property prices—in some markets 30 to 40 per cent isn’t unrealistic given vacancies, lower rents and higher yields,” Gortan said.

Nevertheless, the Simplicity Loans & Advisory director said there are still options available, with Simplicity helping developers with products not readily accessible in today’s market—the trick is accessing them.

“We have access to overseas funds, local family offices, large church groups and a number of obscure mortgage funds that specialise in certain asset classes,” Gortan said.

“Some developers know a few of the main operators but unless you’re working actively in the industry you wouldn’t have relationships with any of the niche players.”

And because some projects might require a more aggressive capital stack, “it’s important to make sure your consultant is well-versed in mezzanine and preferred equity to ensure the development is well funded and has the best chance of success if we experience more market or funding shocks”, Gortan said.

“Even if further contraction of the finance market happens, there are lenders who can step in—but you need to be aligned with industry specialists that can find them for you.

For Gortan, it is this wealth of heavy industry experience and knowledge that sets Simplicity apart in its ability to move projects forward.

“There are hundreds of finance options in the market; only by using someone who is in the trenches daily will you be able to get connected with the best available option for your project.”

Click here to speak with the team today.

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