Following continuing pressure by the Australian Prudential Regulation Authority (APRA) on the major banks to ensure that they comply with their obligations under the Basil III accord, the banks recently reacted by reducing their appetite for construction lending, dramatically reigning in their marketing to developers and in some instances actually reducing the level of staff in their relationship management teams.
This conflict between their requirements to satisfy capital adequacy levels under the accord coupled with their need to improve their return on shareholding to remain competitive with their peers has created a significant problem for many of their developer clientele.
To achieve their objectives, the banks have raised the bar for developers in terms of their condition precedent requirements, reduced gearing levels and increased their pricing on debt, effectively implementing a flight to quality and leaving many of the their traditional but more marginal clients in terms of credit strength, looking for alternative funding sources.
While there are additional costs associated with these alternative funding sources rising up to the meet the market demand, these alternatives do offer their own distinctly different benefits to developers who do not want to be restricted in their ability to meet identified market opportunities due to the constraints placed on their traditional bank which have no direct relevance to their market sector.
According to Holden Capital director Dan Holden, the additional cost of alternative funding products was a small price to pay to ensure the timely delivery of a project.
“By way of example, non-bank money can cost as low as 9-10 per cent per annum, which, which when compared to the traditional bank cost on a medium sized projects of say 30 dwellings, would add as little as $170,000 or 10 per cent variance on normal finance costs to a project with a total cost of $6M,” he said.
He also commented that the changing landscape in the construction finance arena has also given rise to an increase in private investors looking to invest in development opportunities.
“With the uncertainties surrounding the investments in shares, reduced superfund returns and tightening investment yield in investment property, investment in well-structured and risk mitigated developments was providing investors with a very attractive alternative. We currently manage over $70 million of private investor funds and the enquiry from new investors is getting more frequent.”