When seeking funding for a property development project, the key issue for developers has always been the source of funds. In Australia, there has traditionally been an enormous focus on the big four banks, followed by second-tier banks and building societies. While over time a vibrant community grew in the broking industry to guide clients to options that optimise their terms and prices, the structure of transactions remained similar between major funders.
However, with the considerable increases in bank scrutiny, elevated role of APRA, introduction of BASEL regulations, and a considerable change in funding sentiment, major funders have reduced their exposure in the property sector, introducing criteria that excludes a host of previously fundable projects, including those with higher requirements of equity than normal, and those who fill equity from offshore investors, particularly China.
The emerging non-bank market
As a result, a range of non-bank lenders deploying money from family offices, industry funds, and super funds have begun to enter the market over the past decade to fill the void left behind by major banks.
Non-bank lenders have existed for a long time in Australia in varying forms, with many viewing this sector as lenders of last resort. However, over the past 10 years, a number of specialist lenders have entered the market. Distinct from lenders of last resort, this growing group – including names like Max Cap, Wingate, Qualitas, and Dorado Property – are run by leaders with working experience in property and development and use that understanding to offer tailored funding solutions for lenders.
What does this mean for developers seeking funding?
For developers seeking funding, it has become extremely difficult to compare two financial offers as the structure of the transactions can vary significantly. Despite this, navigating this rapidly developing funding landscape effectively has a huge payoff for developers who secure highly tailored funding.
There are reputable non-bank lenders who are founded and/or controlled by professionals who built their careers and experience within the property industry. These roots give developers access to options that provide value-add benefits over and above funding alone by working with professionals that have the expertise and experience to offer suitable structuring at the outset to understand and advise on project challenges along the way.
They also nurture a unique level of agility in the funding decisions of non-bank lenders over traditional major banks. Guided by expert insight that allows these lenders to understand the intricacies of each development project, and holding greater control over funding sources and deployment, non-bank lenders consider development projects that make commercial sense but are excluded from major bank funding.
For instance, the pre-sales requirements of a major bank that prevented an experienced developer from settling and developing a large piece of land in a unique Western Australian location, did not prevent the developer gaining funding from Dorado Property, who were able to spend the time to understand in detail how the proposal sat within the local planning guidelines and propose funding secured by future house and land package sales instead.
Factors to consider
However, developers should be wary when choosing a lender in this space, as not all non-bank lenders are the same. “When it comes to assessing non-bank finance”, Dorado Property Director Tim Moore comments, “it pays to consider a range of issues beyond minimum/default terms, presale cover requirements, and funding certainty”. Understanding the sources of funding, the internal processes of lenders and their ability to work through project challenges, and the halo effect likely to be achieved by having a well-regarded funder viewed by consultants and other intermediaries as giving the project good credibility, are just as important and understanding each lender’s reputation for enforcement and default rates.