Development Finance Trends
|By Development Finance Partners / Matthew Royal|
The construction finance market is changing rapidly. In this blog post article i will tell you about the latest trends in development finance.
The availability of Private and other Non-Bank Funding sources to support the construction industry continues to grow. Such growth is in response to several factors, the most critical of which is the difficult criteria imposed by the Banks in order to secure traditional senior debt. The difficulties stem from two aspects, the first being the upgraded level and cost, of risk capital, Banks are required to commit against construction finance as dictated by the Basel 1V Agreement which is a global agreement on Bank Risk Capital Structures. Under this regulatory environment, and given finite capital resources, Banks have restricted capacity to lend into this market relative to pre Basel.
The second factor, is the recent difficult experience Banks have had as a result of losses in their Property Portfolio,s due to some significant value reductions as a result of the GFC.
These two aspects have combined to create a much tighter market in Bank Finance whereby the Banks can effectively fill their quota, for this portfolio sector, despite imposing significantly lower ratio’s and restrictive conditions , particularly in the area of presale requirements for residential projects .
There continues to be little appetite for any commercial or industrial property projects unless essentially fully pre committed.
The second key element in the rise of Non-Bank funding relates simply to the ample availability of discretionary investment funds looking for yields significantly above the current historically low cash / bond rates. Smart Private Money and indeed Institutional Money from Superannuation Funds and other Fund
Management Groups can see the opportunity in well sourced and controlled development finance opportunities, which have the capacity to generate excellent Internal Rate of Returns relative to assessed risk. The critical aspect here, is rigorous risk assessment at inception, and carried through the development phase throughout the project.
Such funds in many cases are split financings which start at the preference equity end, through mezzanine funding, and on to senior debt tranches. Each tranche is priced to reflect the specific risk assessed, and if delivered by the one institution, a melded rate results. The greatest advantage for the Developer, apart from availability, is that the decision process is significantly streamlined from the current laborious and bureaucratic process under the Banking Regime.
There is also much more tolerance and flexibility in the general conditioning within the funding package, in contrast to the very rigid and inflexible protocols imposed by the Banks .
While it is true that senior funding is, from a margin over the cash rate basis, somewhat more expensive than a typical Bank facility, in absolute terms in this current environment, it is still below rates available in recent history. The responsive turnaround time and flexibility has seen the industry embrace these growing funding avenues.
A further development which we believe will continue is the formal strategic alliance between Institutional and Private Money, and key significant Developers who have the advantage of scale. Capacity to move on opportunities in the current market in the knowledge that there is funding to back up an initiative, is a powerful advantage in the market place.
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