[+] Jittery Banks Leaving New Players Out in the Cold

Raising finance is becoming increasingly tricky for small-scale developers as banks take a conservative view on debt in the current financial climate. While banks may be chasing margins of 15 per cent, it’s cold comfort for developers of projects under a certain threshold. One Sydney developer told The Urban Developer he “wouldn’t want to be a new entrant, it would be impossible to break into the market or get financing”. Lenders are tending to play it safe by dealing with developers who have a good track record, or are existing clients. In its October Financial Stability Review, the Reserve Bank of Australia said the nation’s banking institutions were well positioned to absorb the risk of rising bad debts, but it is coming at a cost. Property Council of Australia data from late last year indicated a weakening sentiment on the availability of debt financing in 2024 and economists have forecast further slowdown in Australia's loan growth this year as the effects of tight monetary policy and a weakening economy fully wash through the market. Results of another industry survey of small and medium-scale developers highlighted debt financing as one of the biggest pain points in developing residential projects. It’s something Sydney developer Oscar Done is all too familiar with. Done heads up Cadmium Property, the development arm of celebrated artist Ken Done’s family office, alongside his sister, Camilla. Their focus is on boutique residential development and small-scale commercial within the pumped-up Sydney market, where holding costs can put a big hole in your feasibility. ▲ Banks, including the Big Four, have tightened up, making it harder for many to obtain debt financing, developers say. “Recently the banks have become extremely conservative,” Done says. “When we started 20 years ago it was three weeks, and it has blown out to three months to get [finance]. Banks are a lot more cautious now and taking more time on due diligence, and they’re quite rigid in terms of loan-to-value ratio.” Australia has a shortfall in housing supply and most capital cities have set their sights on infill development in middle ring suburbs. But financing gentle density projects isn’t as easy, despite demand for increased housing in existing suburbs. Particularly in achieving pre-sales targets to unlock financing. Non-bank lenders and fintech platforms are increasingly providing more flexible capital, which is plugging the gap left by the banks. Property debt investment platform CrowdProperty is one such group. Chief executive David Ingram says the platform is targeting sub $5-million deals in the residential market, which he sees as an “opportunity”. “The speed to a decision is very important for a developer looking to get a project off the ground,” he says. “There can be significant holding costs while waiting for construction approvals, but with a more nimble decision making process you can reduce those holding costs rather than spending money for months on end.” The property financing platform brings together “diverse sources of capital to help fund smaller projects”, Ingram says, to provide target income returns of up to 8.5 per cent. ▲ CrowdProperty chief executive David Ingram. “At its heart, it’s retail investors, mums and dads, getting exposure to investment. It’s predominantly small-scale residential under $5 million, but we also do up to $10 million,” he says. “I think there’s been a structural shift in banks and they’re having to focus on the larger deals. “We know it’s fundamentally homes that need to be built, but finance is the number one barrier to building more homes.” The CrowdProperty survey data of small scale developers indicated more than half of the respondents (56.14 per cent) rated access to debt financing as the biggest barrier to building more homes. Building approvals have slumped in recent quarters amid tight monetary policy, inflationary pressures and cash rate hikes, which HIA chief economist Tim Reardon says will create an economic slowdown in the construction sector. NAB economists point to a Covid-induced change in household formation, tending towards smaller households, as a key structural shift in the Australian housing landscape, which has led to a shortfall of some 120,000 homes. And it’s a problem that persists. But addressing Australia’s ‘missing middle’ and creating more infill development in middle-ring suburbs is one solution that governments are driving home. Recent reports by the NSW Productivity Commission and Investment Victoria have shown that new housing should be created in existing, and well-serviced suburbs. The Queensland government is planning for gentle density in the South-East Queensland Regional Plan to create 900,000 new homes in infill suburbs. The key will be not only getting the planning levers right, but also financing these low-hanging fruit projects. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Residential
Taryn Paris
Thu 25 Jan 24

[+] Jittery Banks Leaving New Players Out in the Cold

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ResidentialTaryn ParisThu 25 Jan 24

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