BANKS WILL FUND A DEAL IF IT FITS THEIR PARAMETERS
We often hear people say, “we can just go to our local bank and get this funded, it ticks all the boxes”. Really!
Recently the big banks tightened up their criteria such as pre-sale requirements, sponsor experience/balance sheet strength and other general criteria required to be satisfied by property investors and developers. They are doing this for a number of reasons but the principal driver is a requirement to reduce their total investor loan growth to below the Australian Prudential Regulation Authorities requirement of 10% p.a.. As a result we are now seeing that they are very selective in which projects they will fund.
Even if a project does “tick all the boxes”, the bank might still not be interested in funding it, with factors such as existing exposure to the sector/local market/client and a preference to improve their risk profile by applying a “best of breed” approach, means that your deal may not measure up even if you are dealing with your long term house bank.
Knowing what the banks appetite is for various types of project is a key advantage and in some instances we have actually re-packaged a deal and presented it back to the client’s existing bank in a way we KNOW they would like to see it and successfully obtained an approval after it was previously turned down.
In our experience it is all about presenting the deal in the right way, knowing who in the bank is the decision maker and how far to push the boundaries or not as the case may be.
BANKS GUIDE VALUERS IN THEIR INSTRUCTIONS TO ENGINEER AN OUTCOME
We see no evidence of this in the market place. In fact we always get the bank to give us a list of their preferred valuers and we then encourage our clients to contact these valuers and engage with them to get a feel for the valuer’s understanding of the specific location and product.
Yes, some valuers might be better to deal with than others, but overall we see no influence from the banks when they instruct the valuers. They simply want to know if the project works and want to use a valuer who they know will give them an honest no nonsense opinion.
GETTING PRE-SALES WILL BE A QUICK PROCESS
This is probably the single most unpredictable component of any Development Project at the moment, particularly in terms of the time required. Many of our clients see the market appearing to accept similar product and are confident that they too can quickly achieve the required pre-sale hurdle. However, in practice we see that the process of securing the sales is only half the battle, with the time and resources required to get those sales to conform to the bank’s pre-sale requirements often grossly underestimated.
Some of the key bank requirements we are seeing at the moment are:
- Sales need to be unconditional in all respects
- NO more than 10% to 15% foreign sales
- NO more than 10% sales to related parties
- Minimum of 10% deposit strictly applied
- A cap on interstate investor sales
- A requirement for local sales to prove demand and pricing acceptance rather than a reliance on interstate investors.
ALL BANKS ARE THE SAME
This is a very interesting point of view; all banks are certainly not the same. Even between the 4 major banks the differences are significant, with some of the more interesting ones being:
- One major bank has for the present significantly reduced its appetite for Construction Finance and is currently not taking on new to bank projects/developers limiting its lending to its established existing clients.
- Official pre-sale requirements are ranging from 110% to as low as 60% debt cover between the remaining major banks
- Only one of the major banks will still entertain a Loan to Cost Ratio of up to 80%. If you want to get the others to do this, then you will need to understand what other criteria they will want to see before they will consider this.
- Only two of the majors have any appetite for syndicated deals, where the major sponsor has less that 5% of the equity in the deal. So again, if you are looking at making your equity work efficiently across a number of projects, you will need help to secure the right major bank funding.
IT WILL COST ME MORE TO USE A BROKER
At first glance this might be appear to be the case, but our experience is that our clients almost always save money by using our services.
A well-positioned broker who deals with many different lenders on a daily basis will be able to advise you on which lender has the best appetite for your style of project.
More importantly, by knowing who to speak to within the bank and where to push and where not to push the their lending parameters, a well informed broker will help you get your project out of the ground sooner and will save the relevant opportunity cost that goes hand in hand with ‘getting started and moving on to the next one’ sooner.
Just like the best Developers use the best town planners to negotiate the best possible planning outcome on their behalf, so the best Developers also use the best brokers to structure their construction finance to secure the best possible financial outcome.