Property development finance experts, Development Finance Partners (DFP) are the first to notice when banks start to tighten their funding practices.
DFP have been warning developers for months that they will find it harder to access finance for development finance and construction finance and developers are now beginning to see that come to fruition.
The Australian Prudential Regulatory Authority has urged the banks to reduce their loan-to-value (LVR) ratios to see more capital from developers whilst ensuring pre sales exceed generally 100% of the loan they borrow.
So what’s making APRA nervous?
There’s a number of global and local economic factors culminating which is impacting how the regulators approach the current banking market. These are:- The Chinese stock market bubble bursting and flow on effect on the Australian property market as Chinese investors postpone purchases of Australian property or forfeit deposits.
- Devaluation of the Chinese dollar (Yuan).
- Faulting efforts of the Chinese Central Bank to prevent further sharp falls in the Shanghai Stock Market which has fallen by 20 percent in the past four trading sessions (as at 26th of August 15).
How the Banks are Reacting
Banks are now beginning to tighten lending indicated by the following recent events:
- 13th of July 2015 - Westpac (Australia’s biggest lender to landlords) announced to the market they now require a minimum deposit of 20% on all new investment property loans. From a pricing perspective the banks have removed all discounted pricing to attract new property investors to the market.
- 14th of August 2015 - Commonwealth Bank of Australia announces a $5 billion capital raise.
- 16th of August 2015 - Westpac is the first to lead the market with an announcement to brokers requiring new interest only borrowers to be tested against their ability to make principle and interest payments.
So what does this mean for property developers?
Tighter bank lending conditions mean developers will need to contribute more of their own capital, with higher loan to value ratios. Pre-sales will be more difficult, and it will be harder to obtain finance without those pre-sales.
What can property developers do to reduce their exposure?
With banks’ tightening credit, there is a flow on effect to property developers. Reducing the concentration of debt or cash with any one bank is key. Developers should be asking themselves the following questions:
- Do you have all of your debts with one lender?
- Do you believe your debts are not cross-collateralised with the same lender?
- How many of your debt facilities are expiring in the next 6 months?
- Do you have formal conditional approval in place to finance your projects which are due to commence inside the next 3-6 months?
- Are you certain your bank will continue to honour any indicative offers, verbal or in writing?
- Do you have undrawn approved LOCs you can draw down in need?
- Do you have any loan facilities due for review in the next three months?
- What is your exposure to a significant percentage of your presales failing to settle?
- Do you have more than one or two banking relationships?
- Are your working capital accounts, cash reserves, rental proceeds accounts, trading and transactional accounts, term deposits, PPR loans and other personal loans all with the same bank?
What can you to do to reduce your risk and increase return on equity?
Despite tighter conditions, developers can undertake a number of activities to reduce their risks, such as:- Restructuring your debts across multiple debt providers. This can dramatically reduce your debt risk, improve liquidity, provide you with control, creates healthy competition and forces your debt providers to compete more on risk and pricing.
- Put firewalls between your liquid assets, sources of your cash flow and your development risk.
- Raise undrawn LOCs against surplus security to make you bullet-proof and give you the ability to invest counter cyclically/opportunistically if the market turns.
- Hold multiple banking relationships to reduce the risk of liquidation.
- Keep some mystery…never let any one bank know absolutely everything about your entire group position.
- Have your debts spread across multiple lenders. This buys you substantial valuable time as it gives you the ability to address events of default long before they become registerable and contagious. It also gives you the valuable ability to manage your group position by ensuring you can finance your most profitable projects and thereby demonstrate the ability to show debt reduction.
- Don’t find out the hard way banks will force your most profitable assets first. Why would your bank do that? Because they will deliver debt reduction the fastest.
- Utilise no doc capitalised interest facilities secured against passive assets to dramatically improve cash-flow and reduce the need for equity partners and negate the need for you to be forced into cross-collateralising your passive income producing assets to support higher risk development facilities.
- Consider capital partners who will consider standalone facilities with high LVRs, lower or no presales requirements, less restrictive covenants on who you can sell to, fast approvals and fast settlements so you can turn your existing debts and land banks into profits in a far shorter timeframe.
- Utilise pref equity/mezzanine finance to improve/maintain liquidity to:
*Reduce or negate your need for equity partners
*Reduce your total sales and marketing budget
*Increase your equity IRR’s,
*Bring your projects to market faster before the end of this cycle
*Reduce the number of presales required
*Bring twice the number of projects to market at the same time
*Increase the rate of growth of your business which is limited by your ability to recycle your equity and constantly reinvest profits inside of a cycle.
If you are looking to reduce your exposure, investigate non-bank finance options or receive financial advice as it relates to your current projects contact Development Finance Partners.