The rapid transition in credit and property markets over the past year is forcing property developers to get creative and find new ways to keep their project pipelines flowing. With LVRs and valuations declining, while interest rates and input costs rise, many deals are being restructured and feasibilities reassessed.
While a string of high-profile builder collapses has hit the headlines recently, the plight of property developers receives much less media attention. Yet the property development industry too is battling to adapt to the rapid transition in credit and property markets over the past year.
With LVRs and valuations declining, while interest rates and input costs rise, developers are being forced to get creative and find new ways to keep their project pipelines flowing. Existing deals are being restructured, and future plans reassessed, as costs to complete and sale prices keep shifting.
Development Finance Partners director, Matt Royal says the industry is currently seeing a lot of refinancing, which is a natural part of this stage of the property cycle.
“Whether developers have a problem with their existing lender, or they need to pull cash out of one asset and put it into another, many are currently looking around for new finance solutions,’’ says Matt.
“The banks are now lending less, and at lower LVRs, and they are asking developers to tip in more equity or generate more pre-sales. But not everyone has spare equity lying around or can afford to wait for those pre-sales in the current slow market.
“As a developer with commitments and projects to deliver, you can’t afford to just sit on your hands until things improve. You need to find a way to keep moving forward, even if it means accepting a lower profit margin than expected.’’
The innovative non-bank lending sector is currently proving a lifeline for property developers seeking new solutions, and many are now exploring this option for the first time. However, Matt says it’s important for borrowers to understand the difference between the banks and those credit providers not covered by the National Credit Code.
“The banks are highly regulated, and their standards of governance and professionalism are very high,’’ he says. “Moving out of the banking sector into the world of unregulated credit is like leaving the swimming pool for the ocean – there are sharks out there.
“It’s important that you take time to establish who has the credentials, the capabilities and the intention to deliver on their promises.’’
It's up to borrowers to do their own research on a finance broker or non-bank lender whom they haven’t dealt with before. From internet searches, online reviews and social media sites to conversations with others in the construction industry, the more data points you can gather, the better the picture you can build up of who you’re dealing with, says Matt.
The most important thing to consider is their track record.
“Knowing that you’re working with someone who has delivered for their clients before, and can provide case studies, testimonials and references to prove it, can give you confidence in their ability to deliver for you,’’ he says.
“Ask them to walk you through some examples of developments they’ve financed, from the LVRs and the pricing to the problems that they solved. They should be transparent and happy to provide you with information you can independently verify.’’
Commercial property development and finance is a highly specialised industry, and people in management positions should have the skills and experience required to do the job.
“Visit their website and see what information is available about them, read their CVs,’’ says Matt. “How long have they worked in development, commercial lending or property finance? There’s no substitute for years under the belt.’’
A history of litigation, legal actions or negative reports suggests a broker or financier may not always have the best interests of their clients at heart, or may prove difficult to negotiate with when problems arise. Searching databases such as court list records, ASIC registers and credit reports may reveal information on past disputes they have been involved in, or sanctions they have incurred.
The property cycle keeps turning, and FOMO will soon return to replace buyer hesitancy. For developers, the challenge is to get through the intervening period and remain well positioned to take advantage of the coming change in sentiment, says Matt.
“The market is waiting for the ceiling on interest rates and the floor on property prices to appear. Once that happens we can expect a rapid rebound in clearance rates and sale prices, because vacancy rates are extremely low and the existing undersupply of accommodation will only expand as immigration picks up again.
“Already there are early signs that global inflation is beginning to peak, and the next positive phase in the cycle could begin as early as this spring season.’’
DFP specialises in construction and development lending. We have been working for property developers since 2011 and have funded loans in excess of $3 billion. Our finance team have an average of 25 years’ experience in the industry, and beyond facilitating access to finance we provide support for developers through structuring finance, project feasibility and project management.