Why The Banks Aren’t To Blame For Tighter Funding Conditions
At Development Finance Partners (DFP), as specialists in funding construction and development we are seeing a very distinct transition from traditional retail / major bank funding to private or secondary funding options.
More often than not clients have been exhausted by the major Bank’s changing lending guidelines and ever shifting credit policies. What was fine last month from a funding perspective is not this month and it appears to be getting harder
There are obvious sound fundamentals that must be taken into account such as Concentration Risk and Over Supply Risk, however the real driver behind this is not just some faceless credit manager, but more so the Reserve Bank of Australia (RBA).
The RBA has the unfortunate job of trying to keep all sectors of the Australian Economy in a healthy state; its job has been made more difficult due to low inflation, increasing unemployment, lower commodity prices, and moderate Global Growth. In the face of all of that, the property/construction sector is enjoying an all-time high, but at the risk of a housing bubble being created, the RBA has signalled on a number of occasions that macro prudential polices for home loans should be engaged.
The Governor of the Reserve Bank started flagging this back in September last year, where he stated “Limits on bank lending to cool down the housing market was sound and sensible. This message was repeated by the Assistant Governor at the Economics Reference Committee in October, where Policy makers were looking for ways to keep the housing market from overheating while at the same time keeping interest rates low to help the rest of the economy.
That same message has also been in the last 2 interest rate announcements as follows;
“The Bank (RBA) is working with other regulators to assess and contain economic risks that may arise from the housing market.”
This is really not what you want to hear if you’re funding development and or construction. DFP flagged this in October last year, in our Blog: – Are Property Developers Prepared?
Add to the above the Federal Government trying to bring in a $5,000 levy to overseas property buyers and retail banks restricting the sales limits on developments to off shore property buyers, then you find yourself in a very tough position, unless you have substantial cash so as to negate any risks associated with borrowing.
Given the substantial influx of credit to DFP for Medium to Large Projects it appears that the simple answer to our Blog in October last year is NO, Property Developers are not prepared.
Private capital partners (such as the one’s DFP has been able to secure) take a different view to local credit; as an example if your capital partner was Asian based (with an Australian presence) you will more than likely not see the same risk associated with off shore buyers than local Banks. Add to this the 20% decrease in the AU dollar the off shore buyers have already seen significant returns.
Furthermore due to the fact that a lot of the alternative funding options do not have a retail presence, they have not taken on the same aggregate exposures that the retail banks have and have appetite for further risk.
DFP has recently funded projects with No Pre Sales and a Higher LVR, with our clients being kind enough to provide testimonials in public forums.
So if you are exhausted from getting nowhere then DFP may be able to help you find the right funding solution for your current or next project.
Could your next project benefit from some expert development finance? Get in touch.
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Sydney NSW 2000
P / 02 8916 6246
Level 30/35 Collins Street,
Melbourne VIC 3000
P/ 03 8692 0082
Level 18, 175 Eagle Street
Brisbane QLD 4001
P / 07 3041 4136
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