With the first quarter of 2018 behind us there are already some shifts being identified in the financing of Sydney development projects. The government’s regulatory controls are starting to have an effect with a softening in residential prices and further tightening in credit availability through the traditional banking sector. We have been highlighting to clients that the tightening has been occurring for the past 2 years, however it is only recently where this has hit home with many developers now accepting this reality and have begun to ask us to rule out seeking bank finance option having been through the process and knowing the outcome.
Notwithstanding, demand for finance remains strong and evolving as a result of changes to bank lending appetite with the obvious trend towards non-bank financing being explored by many bank quality developers who now need other options.
The controls and restrictions put in place by regulators and banks do not need be revisited here, however the consequences are that developers are being required to contribute more equity, secure higher qualifying presale volumes (i.e. minimal FIRB), against a backdrop of tougher residential investment and lending to foreign buyer conditions meaning a longer lead in period for a project to commence construction.
The resultant lending products required by developers are falling into the following broad categories:
- Land loans (with or without DA)
- Construction Loans (with nil or lower presale requirements)
- Residual stock lending to reduce the cost of holding unsold stock and achieving an orderly sale process.
The Residual Stock loans are becoming more prevalent as developers cast their eyes forward to completion and strategize how they will deal with what to do with unsold stock as sales rate slow, given banks have also tightened lending requirements in this area. This is particularly relevant if a developer intends to hold greater numbers than 4-6 lots in a recently completed project.
There is some good news though as non-bank funds and private sources of capital continually grow and evolve to bridge this gap. There are many funding options outside the banking sector with the capacity and appetite to take on these sorts of exposures and that excludes offshore avenues which tend to be more focused on larger ticket loans of $50M plus.
It is a given that non-bank and private funding are more expensive than banks however the trade-off is that there is greater speed of approval, lower presale requirements and generally higher gearing levels on offer. Factors such as suitability of end product to preselling are also taken into consideration, so developers targeting owner-occupiers are provided with a level of flexibility to commence projects at a lower initial presale hurdle with further sales milestones to be achieved during construction instead of being subjected to a one size fits all approach.
All this means a developer can commence construction sooner and complete their project against an economic backdrop which is becoming more uncertain.
In the next 6 months we expect to see more developers bringing forward their financing plans especially where it involves settlement of new project sites. This is already happening with their aim being to establish the funding costs and lock in terms. Banks will continue funding but it will be selectively to those developers who can meet their tougher parameters.
Areas where demand for finance and lender appetite align are land subdivisions especially along growth corridors supported by infrastructure development (north-west and south-west Sydney). Land loans are expected to attract more interest and for longer loan terms between 1-2 years as the projects may not be as shovel-ready as in prior years due to loan conditions not being met.
We expect to see less projects with high levels of foreign buyers whilst unit developments are becoming more challenging as presales are becoming more difficult to achieve. On a positive note, there have been greater volumes of capital seeking be invested into loan opportunities as the returns are attractive to investors so pricing has improved as competition amongst non bank funders increases.
Melvin Seeto – State Manager New South Wales