A Development and Funding Update from the Trenches
In today’s rapidly changing economic landscape, developers must remain up to date with what is happening on the front line. DFP have a deep understanding of the impact that current events are having on projects and funding, from the negotiation phase through to completion.
Funding in the current environment is the toughest we’ve seen it. The global COVID-19 pandemic and the accompanying market uncertainty have presented unforeseen challenges, manifesting in lenders reducing their lending limits and, in some cases, suspending operations entirely.
According to NAB chief executive Ross McEwan, a possible model shows Australia’s economy contracting by 3% in 2020, with no improvement until 2022. Similarly, advisory firm KPMG said, “The economic damage will continue for some time and in all likelihood will escalate in intensity.”
While there are some more optimistic models showing a faster rebound, it is yet unknown which route the economy will take on the back of the global pandemic.
So how are these changes to the economy affecting development funding?
Director of Assured Management Limited, Nick Davoren, spoke to the Urban Developer about why more developers are moving away from banks when securing funding for projects. “With tightening loan-to-valuation ratio prerequisites, rising equity requirements and increasing pre-sale hurdles to above debt coverage levels, the big four are losing their appetite for development.”
The uncertainty in the current property market is driving banks to cut back on lending to development projects. However, while securing funding through a bank is becoming increasingly difficult, arranging it directly with private lenders is proving to be almost impossible.
In response to recent market changes, private lenders have adjusted their risk profiles to reduce not only the number of projects they take on, but also the loan-to-value ratios of the projects that do go ahead.
Projects are being analysed beside stricter criteria, with private lenders taking drastic measures to limit risk.
To be approved, developers must be highly experienced and willing to contribute significantly more equity upfront.
Private lenders are also favouring multiple small-scale projects to diversify their portfolios and spread the risk across multiple avenues.
The rules are changing daily, making it difficult for stakeholders to remain informed and confident in their decisions.
To combat this, DFP have set aside dedicated resources to ensure that funders are updated daily with the latest information.
Our close and transparent relationships with our funders allow us to go ahead with deals swiftly, even during the most uncertain times.
An area that has seen increased demand during this time is advisory work, as clients are seeking guidance to minimise the fall out when deals take a negative turn. DFP offer advisory services alongside development funding services, liaising with capital partners, renegotiating repayment terms, helping with equity structuring, and guiding clients towards improved profit margins.
Speaking to SMS Magazine, Centrepoint Alliance head of research, Miriam Herold, said, “It is at times like these that advisors can really add value by helping a client to understand their individual time horizon and financial requirements.”
Advisors are optimistic about the adaptability of the industry in unprecedented times. Despite the volatility of the current market, property developers are faring better than others within the property sector, as development sites have not been affected by the lockdown.
Currently, advisors are focussing on making sure their clients’ development proposals are suited to the market changes over the next six months, to help them overcome the immediate challenges facing the property sector.
Now more than ever, developers need to partner with both funders and advisors to navigate through the crisis, with emphasis on open communication to help stay up to date with an industry in flux.
Contact us for up to date, on the ground advice on development finance.
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