Is your bank making it difficult for you to borrow?
What are the non-bank alternatives?
Whether you’re a highly experienced Property Developer or not, getting the financing of your Property Development right from the outset is a vitally important element of any Property Development Strategy. In today’s post GFC environment failing to incorporate a well structured financing strategy from the very beginning into the total development strategy is a recipe for disaster.
Investing in real estate is one of the most important financial decisions anyone can make and for the majority of Australian’s, obtaining funds from banks is the challenging part of the acquisition process. So why is it proving increasingly difficult to borrow from the Banks?
Most notably, the key contributor to this is a change in the behaviour of banks towards customers after a series of economic events that shook the world. The speculative property bubble that stumped the minds of consumers during the global financial crisis has driven a credit crunch for easily obtainable mortgages.
Prior to the year 2007, most Aussie banks presumed that they could always meet rising credit demand from their customers by tapping wholesale markets. But during the financial crisis, wholesale markets suddenly closed, cutting off that source of credit for banks. That hoisted a red flag among banks to consider credit to be rationed rather than to be marketed. Underwriting conditions for loans to SMEs appear to have been tightened for the first time since the first half of 2010. There is some evidence of deterioration in SME credit quality seen over the last 12 months, especially in sectors exposed to the high Australian currency. Tighter collateral requirements and maturities were highlighted across loan bookings. Stricter lending standards in the mortgage market are mostly due to repricing. Over the past year, many borrowers have complained that they have been unable to access funding – even those well established businesses with existing lines of credit. NAB business banking Chief Joseph Healy told recently in an interview that more banks are tougher now, but still willing to lend to small and medium businesses.
Adding to the difficulties for borrowers, banks have begun setting their mortgage rates independently of the RBA. ANZ Bank reported its mortgage rates would remain unchanged at 6.8%. Big banks fear that higher funding costs would keep pressure on them to lift mortgage rates for customers. Borrowers faced with uncertainty on the movements of interest rates, which mean they need to work harder at securing a good home loan deal. Loans offered by banks allow 97% of the value of a property, which declined from 14% of the total on offer in 2008 to only 2% in 2012 in a sample of 2,000 home loans. In 2011, 5% of loans could be taken out for 97% of the value of a property.
While recent cuts in the interest rate by the RBA are expected to lift demand for home loans, few banks expect the pace of borrowing to match the level seen before the financial crisis. Softer house prices seen over the past year would likely act as another drag on lending.
As choice for funding source, banks continue to dominate the lending market, with new data revealing financial services offered by banks now account for almost 100% of all loans written in Australia.
Banks managed to increase their market share from 92.6% to 94.1% between October and November 2012. This indicates that there is still some room for growth of Australia’s banks and interestingly, it is Australia’s private sector debt that is significantly lower than the ratios for those countries that have experienced significant upheaval in their financial systems like the UK, US and Spain. Even then, Australia does have a particularly larger ratio of mortgage to GDP, which is higher than many other developed economies. The small percentage increase of Australian banks’ NPLs during the global financial crisis has held relatively constant since. By comparison, the UK and the US have seen exponential increases in NPLs, and still rising.
The property bubble has taught a lesson in managing debt, both consumers and banks are now in a “deleveraging” mindset. An estimated 41% of Australians currently want to place their spare cash into a bank deposit, up from 28% five years ago, while 23% want to pay down debt, which doubled the ratio five years ago.
Business firms have tended to behave cautiously, prudently consolidating their balance sheets, limiting debt and growing their holdings on low-risk assets. This makes banks far more conservative about lending money and fearful about how they manage their balance sheets. In particular, banks are desperate to hang on to their swelling deposits by cultivating long-term relationships and paying more to depositors.
Could your next project benefit from some expert development finance? Get in touch.
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