While those looking in on the world of property development wonder what type of projects are in store in the coming months or years, property developers have another question in mind: what type of project has the best chance at securing funding right now?
Contrary to popular belief, it’s not the specific product’s attributes that are the most important factor in funding decisions for non-bank lenders, but rather the features of the property’s broader context – the positioning relative to competitors’ offerings, walkability score, adjacency to amenity and transport, and likely saleability if something went really wrong.
It’s only a slight shift in perception, but it’s one that has far reaching implications. It means a whole host of different projects, at different stages of completion, in different locations, and in different sectors from apartments to medical centres all have the same shot at securing funding.
Below, we list the four most important factors on property financiers’ minds when assessing loan applications.
Projects sold to owner occupiers are far preferred by non-bank lenders, for a pretty straightforward reason: owner occupiers are statistically more likely to settle.
When a buyer purchases a property, they pay a deposit and contractually commit to paying the balance, but there’s often an extended period between when paying the deposit and moving in.
If prices decline in that time, a buyer may fail to settle, which presents a problem for paying back the property finance.
If that buyer is an owner occupier, the property they choose is their home. They form a strong emotional attachment, and they’re unlikely to change their minds. They’re also usually Australian residents, so can be more vigorously pursued to fulfil their contractual obligations.
As an added advantage over rental investment buyers, owner occupier finance doesn’t rely on finding a tenant and renting at the right price.
Rental investors service their mortgage by rent, so declining rent becomes a significant issue.
As the property market conditions get tougher around the country, smaller projects are particularly appealing to non-bank lenders.
Non-bank lenders assess every project individually to make funding decisions. This means they are more flexible with pre-sales than major banks, who take a broad-brush approach to applying funding hurdles.
Opting for boutique-sized projects is a defining trait of non-bank financiers. Boutique projects don’t need many pre-sales to become an attractive option, and funding is much faster as a result. For example, while there are currently a lot of construction loan opportunities around major cities like Brisbane and Melbourne for non-bank lenders, Dorado Property have made a deliberate decision not to compete on first mortgage loans for larger construction projects, and instead focus on boutique projects with sub-$50m development costs.
The location of a project is one of the most important factors in deciding whether to fund a project, but while many assume that the closer to a major city the better, this isn’t necessarily the case.
The level of transport connection with a city is important, but most of all non-bank financiers look for quality locations without a huge amount of supply to compete against the project.
A housing project in Port Coogee with a direct route to Perth CBD, for example, is just as appealing as a townhouse project only a short walk from the city centre (and in some cases, more so).
In a general sense, supply and demand modelling is essential. If there’s not much pent-up demand in the area, or if the area is in a downturn, there’s a risk of the property not selling successfully and the loan defaulting.
The concept applies not only to the size of the population in an area, but also the specific needs of that population. Retirement and childcare are two increasingly popular areas of property development, for instance, but while they suit blue collar suburbs perfectly, in affluent suburbs it’s a different story.
Non-bank financiers assess emerging trends to become as expert as they can in a short time across the entire Australian property market, so that when an attractive project appears in the right location, they can recognise its merit early on.
When assessing a project, non-bank financiers look for areas that will outperform in a negative market. Individual suburbs perform very differently in a property price downdraft.
Take Perth as an example. Since 2014, the average dwelling prices across the city have fallen 17 per cent back to 2006 levels.
On a suburb by suburb basis, there are huge differences in prices, making some areas very attractive despite the macro-level downturn.
Suburbs like Bellvue, in line with the overall average, have fallen 19 per cent, but others like Bickley have risen 40 per cent in the last year.
Perhaps the most appealing factor of all, and unique to lenders like Dorado Property, is a validated exit. As a company that began by funding development finance, Dorado has relied on validated exits as a requirement for any project, at any level in the capital stack.
Validated exits consider not just the repayment strategy, but also factors like the borrower’s experience, loan-to-value ratio, and other lenders involved in the project to paint a much more complete picture of each individual case.
Making sure there’s a clear exit strategy means that Dorado and the developer can work together in a partnership and avoid an unnecessary legalistic confrontational approach.
It also means that funding can come in at any stage of the development, and the longer the project has progressed, the more validated the exit becomes.
But there’s an added bonus for developers: it’s not the type of project that matters most, but the exit. When building a picture of any project to present to a non-bank lender it is crucial to consider not only the optimal exit, but various alternatives in different market scenarios.
Anything from the mezzanine-financed equity release of a completed wastewater pump station to the first mortgage-financed settlement of a 200-hectare land holding is assessed with equal weight and an equally keen eye on the exit.
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