Bank versus Private Funding Options
Bank parameters for the Construction Sector have tightened. However, Private funding options can plug the gap by pricing for risk.
Australian Banks’ and Construction Finance
The Australian Banks reduced appetite for construction finance has been well publicised. The are several contributing factors for this and they include:
- A fundamental decline is presale sales rates.
- Heightened settlement risk and concern pertaining to the Banks’ existing exposures created by numerous factors, including: the Banks’ own Retail Banking Divisions slowing the rate and volume of lending to property investors, declining valuations at settlement, and a lack of funding for FIRB purchasers.
- From a perspective of return on equity, development finance is not as attractive when compared to other financing opportunities.
- The short to medium term fundamentals have declined in the markets where construction finance approvals have been historically high in recent years.
Impact on the Australian Construction Finance Sector
The impact of the Banks’ reduced interest in the construction financing sector has included the following pitfalls:
- More stringent credit risk assessment especially with respect to new to bank clients.
- Reduction of loan to value ratios reduced from 80% TDC to 65%-70% for construction finance.
- Landbank facility approvals are exceedingly difficult to obtain any LVR.
- Increased presale levels from 50% to as high as 120% debt cover.
- Increased complexity with respect to credit assessment and approvals.
- Slower timeframes for approval and settlement.
- Increased financing costs due to increases in Loan Establishment Fees, Margin and Line Fees.
- Facility limit approvals greater than $20m are becoming increasingly more difficult to obtain.
- Not recognising foreign investors as a qualifying presale.
- Pulling back and/or not lending to foreign investors and developers.
Pricing Risk in Construction Finance
Australian Banks don’t Price for Risk
The combination of the above from all the major and secondary banks has had a significant impact on the ability of construction and development projects to get off the ground. Developers that once needed equity of 20% of project cost are looking at equity requirements of 30% minimum. The presale hurdle also means that funding is delayed while presales are achieved in a softening market.
Declining site values, increased construction and sales costs have resulted in heightened levels of equity requirements and put downward pressure on the viability of many projects.
The policy shift only serves to increase the likelihood of a property correction. Australian Banks offer relatively low interest rates and do not price for risk. They could easily raise their interest rates which would enable them to consider quality projects at slightly higher LVR’s and/or lower presale hurdles. Conversely, when the market has been through a correction, Australian Banks generally compete for market share and help to create an environment for the next property surge.
Benefits of Private Funding
The Private Funding market provides a buffer by pricing for risk. Over the past twelve months there have been new private fund managers entering the Australian market to take advantage of the gap created by the Banks. The price differential is offset by the lower presale hurdles, the higher loan ratios, the speed to approval and the speed to settlement.
DF Partners has an excellent history of successfully facilitating significant funding packages for their clients, as well as a strong record of landmark projects and transactions.
Discover how DF Partners prices for risk with our project funding case studies.
DF Partners want to make your next project a success.
Could your next project benefit from some expert development finance? Get in touch.
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