‘Gold Brick’ Bias Creates Niche for Non-Bank Lenders

Developers are facing the biggest credit crunch since the global financial crisis as risk-averse banks suppress their appetite to lend to new projects.

Speaking at The Urban Developer’s property funding webinar last week, financiers from across the country discussed how the global pandemic is challenging the financial economy underpinning the property sector.

The panel agreed that the retreat of the major banks from anything other than “gold brick” assets—i.e. strong tenant coverage, rental streams and good sponsors—is creating an opportunity for non-bank lenders.

“What we are seeing are fundamental, structural changes within that market,” Stamford Capital managing director Dominic Lo Surdo said.

“With tight funding and weak apartment sales continuing to leave many projects stranded, the appetite for alternative funding has strengthened in recent months.”

Pandemic-induced fluctuations to property valuations are central to the challenge for both landlords and developers.

“There has been a real fracture in the market between historical data and the point at which you are trying to value an asset,” CVS Lane managing director Lambros Sioros said.

While volatility and uncertainty are leading to a more cautious approach among lenders of all persuasions, the paradox is that liquidity remains at historical highs.

“Liquidity is more important than pricing and wherever there is liquidity, there is a deal that can be done,” Lo Surdo said.

▲ Average aggregate margins and line of credit fees offered by banks have increased since the start of the pandemic.
▲ Average aggregate margins and line of credit fees offered by banks have increased since the start of the pandemic.

Lo Surdo pointed to the recent uptick in industrial property and data centres, driven by the growth in e-commerce, as one of the winners to emerge from the global pandemic.

“Where assets are ‘gold brick’ credit opportunities the banks are coming down on pricing,” he said.

“If it is falling outside of those metrics, standard banks aren't doing the deal which has created an opportunity for the non-banking sector to grow.”

Development Finance Partners director Matthew Royal noted that the funding for small to medium-sized developers showed signs of rebounding in recent weeks, thanks in part to improved sentiment.

“Where usually we would have seen a 14 per cent internal rate of return and seen pricing come down by about 200 basis points in the last month,” Royal said.

“Institutional, offices, and high-net worth investors are flighting from cash and equities are looking for quality, risk, deal flow and stable returns including, mortgage backed, first mortgage securities, especially with a focus on residual stock.”

Without sufficient pre-sales, development funding becomes prohibitive for lenders but leading into the pandemic residential markets were reeling from recent revelations around construction defects, including flammable cladding, which has turned potential buyers away.

“People don’t have a fear of loss in staying out of the market — buyers still need to transact for all sorts of reasons—downsizing, first home buyers, life events beyond the investment market—they don’t stop, but confidence stops,” Royal said.

“Developers and financiers need to hold their portfolios, land banks and nerves at the moment because the market conditions will come back.

“The government will look at the holes in the market—in terms of economic risk, and look to plug them and continue to stimulate the market almost indefinitely.”

▲ National dwellings approvals are expected to continue to trend downwards over the coming months.
▲ National dwellings approvals are expected to continue to trend downwards over the coming months.

The build-to-rent sector—long-term rental apartments leased by a single institutional landlord—is also becoming an alternative for many traditional developers currently, which are either lumped in with unsold apartments or are unable to attract buyers.

“We are seeing a lot of build-to-rent projects emerging currently, particularly smaller developments, and we weigh each potential project on the borrower, location and asset expected returns and cashflow,” Real Estate Credit executive director Cathy Houston said.

“There is a supply and demand conundrum in that space and we are looking very closely at the rental rates and vacancy rates.”

Houston said appetite for the hotel market had remained despite the crippling impacts of the pandemic, with absorption in Adelaide, Brisbane the Gold Coast better placed to take on new supply and recover more quickly.

Attitudes have also changed towards higher-density living, encouraging people to move to the suburbs or regional centres and work from home.

Lenders pointed to regional markets, which had continued to outperform metro markets on average over the past year, remaining insulated from the economic shock and less reliant on international trade.

Regional median prices have remained higher or steady in all states, due in part to employed workers, who are working remotely, looking to take advantage of prices and relocate with their current jobs.


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