How To Fund Your Development In A Changing Financial Environment - Matthew Royal, Development Finance Partners

In the lead-up to this month's Insights Series ‘How To Fund Your Development In A Changing Financial Environment’, The Urban Developer caught up with Matthew Royal, Founder & Director of

Development Finance Partners to get his take on what are some of the obstacles and solutions to funding a development in times of economic and financial change.

Matthew has extensive experience in the property development and investment industry; he has exceptional knowledge and understanding of the financial criteria and methodology used in assessing property development and investment proposals.

Matthew has participated in the negotiation and consummation of numerous significant property development and investment acquisitions and joint ventures, as well as being responsible for the finance raising and due diligence enquiries and processes within DFP.

What are the biggest funding obstacles that property developers are currently facing?

The major Banks' general credit appetite for Property Development Finance has sharply deteriorated due to a number of factors.  The reduced credit appetite combined with the deterioration of land values, increased development costs and the on completion values for residential apartment have resulted in an average increase of 200% in the amount of equity required than was the case only 12 months ago.

On a daily basis DFP receives requests for help from Bank customers after having been told by their existing Bank/s they can simply not approve any new construction finance for them on any terms, despite having been a loyal and performing customer of the Bank for many years. 

Other factors -

• Timeframes for valuations, indicative finance approvals, legal certification, formal approval and settlements are all taking 50%-100% longer than was previously the case.

• Increased credit approval authorities such as “Internal Bank Valuation Specialists and Internal Property Risk Specialists” with the major Banks are slowing the credit approval process and making finance approvals more uncertain.

• The quality of sales which relates to settlement risk is a major funding obstacle to many Property Developers at the moment. The Banks criteria for what they will accept as qualifying sales has significantly tightened making it more difficult to achieve required sales rates and sales levels.

• The availability of credit to both residential and non-resident purchasers is increasing the settlement risk.

• The purchasers Bank instructed residential Valuations of the completed apartments are increasing coming in well below the purchase price which is increasing settlement risk and in many cases creating significant additional costs.

What global factors are influencing the decision making of the major Australian banks?

Global Instability and heightened uncertainty is placing huge pressure on all internal banking regulators such as APRA, to force their local Banks to continue to strengthen their balance sheets to become increasingly “unquestionably strong”.

The main global factors which is of highest concern right now in the minds of Australian banks and central bankers around the world is the downside risk created by Falling GDP forecasts in China, and other emerging market economies are of concern, and of higher concern is the rapid run up in debt in the post GFC period. In China, especially, slowing economic growth has raised the possibility of a sharp increase in defaults, particularly within industries now burdened by an over investment in capacity.

What new funding structures are property developers turning to in response to changes in the appetite of financiers?

There is no doubt the Australian Property Development Industry is feeling the effects of the sharply reduced appetite for construction finance. As Australia’s top property finance advisor, DFP is successfully arranging finance for its clients by taking advantage of the following new funding structures:

1. Global Investment Banks and offshore hedge funds are re-entering the Australia Property Finance and have appetite for Stretch Senior, Mezz, Single Asset Pref Equity, Unsecured Corporate Pref Equity.

2. Local Family offices have an appetite for Stretch Senior, Land Banks, Pref Equity, Residual Stock facilities, Qualifying Pre-sale Guarantees in lieu of traditional pre-sales.

3. Private Mortgage Trusts and specialist private construction finance underwriters have an appetite for no pre-sales financing, land banks, Mezz and first mortgage construction finance, commercially or residentially secured equity lines of credit.

4. Local first and second tier have an appetite for conservatively geared construction finance with Mezz but is late stage and with strong quality local pre-sales where the basis credit risks are reasonably mitigated.

What advice do you have for aspiring property developers and investors? 

1. Surround yourself with highly experienced and commercially minded advisors who have the strongest track record within their field of expertise.

2. Increase your investment and marketing, sales and advertising directed at selling into the local market.

3. Arrange your finances in such a way that allows to complete your existing pipeline of projects in fundamentally sound markets where your competitors will be unable to.

4. Arrange your finances that will allow to acquire sounds at a heavy discount to recent markets and position your property business for growth again just prior to beginning of the next property cycle.

Matthew will be joining a panel in Brisbane, Sydney & Melbourne with David Kenney - Managing Partner of Hall Chadwick, Baxter Gamble - Managing Director of Development Finance Partners, and Adam Di Marco - Publisher of The Urban Developer/Director of Marquette Properties.

The event will include a 2-course lunch and a range of drinks. 

Tickets are very limited, so make sure you get in while you can!