As any property developer knows, Property is no longer the golden child it was when it comes to the major banks and their appetite for lending.
However, we also know that there is still more demand than supply in certain areas. Just recently a new project in Manly NSW, of 24 three bedroom apartments all sold off the plan in the opening weekend. There is still plenty of success stories for the right project in the right location.
What’s true is that the funding landscape is changing and Developers should be aware and adapting to change.
The contributing factors to a decrease in bank development funding
- A fundamental decline in presales sale rates
- Increased settlement risk due to valuation write downs of up to 30% or purchase price
- The view that banks are more exposed (which is why APRA has limited the rate or residentially secured credit growth to 10% p.a.)
- A lack of funding for FIRB puchasers
- Business lending is now viewed as more attractive/profitable by the banks
- The fundamentals in the short to medium term for construction finance approvals are not as high as they have been in recent years
What does this mean for Property Developers?
Developers are experiencing and/or should expect:
- More stringent credit risk assessment – particularly as it pertains to new to bank clients
- Reduced loan to value ratios (down to 65-70% TDC from 80%) for construction loans
- Obtaining any LVR for Land Bank facility approvals is becoming exceedingly difficult
- Increased pre-sale levels from 50% to as high as 130% debt cover
- Increased complexity with respect to credit assessment and approvals
- Slower approval and settlement timeframes
- Increased financing costs due to increased Loan Establishment, Margin and Line fees
- Obtaining facility limit approvals for amounts over $20m are becoming harder to obtain
- FIRB pre-sales are non-qualifying
- Heavier reliance on a the Developers Net Worth vs the value of the project
- Increased settlement time for pre-sales combined with Developer holding higher levels of stock on completion
- Increasing levels of financing working capital via residual stock facilities
- Small to mid-tier builders exiting the market or going broke (due to increased competition for projects and increased construction costs)
- More non-bank lenders entering the market.
Where are the opportunities for Property Developers?
- Develop new more efficient financing strategies at both a group and individual project level
- Financially strong Developers will be able to acquire new development sites at reduced rates
- As construction slows and projects are delayed, Developers will have less competitive supply to deal with
- Developers will have an increasing amount of non-bank capital available to them as an alternative to bank or self-funding.
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