The coronavirus crisis is creating an unprecedented “new normal” for workplaces globally—including property developers and those providing funding for projects.
According to leading financiers Development Finance Partners (DFP), daily updates from its lenders have allowed the business to create three tiers in order to categorise pressing needs.
The first tier, known as “short funded”, are private lenders who arrange individual investors to fund individual projects on a case-by-case basis.
The majority of these lenders have pulled back all lending on loans yet to settle.
The second tier of lenders are “institutional fund managers” who have long-term committed funding lines and whose appetite for new development and construction finance has significantly reduced to low or zero levels.
The third are “institutional fund managers who are well-capitalised” with high capability who have a mandate from their shareholders to counter-cyclically lend to quality credit risk in order to increase their market share.
In doing this fund managers create new lending relationships with high-end builders and developers who they can support during this challenging time.
So, what should you be doing if you are currently in the process of a development and are trying to navigate these uncertain times?
Property developers and investors need to get ahead of requests for information from their financiers to adequately manage their financing risk.
Construction delivery timelines actuals versus forecast, pre-sales settlement risk, on-completion sales value risk and Covid-19 management plans are all high priorities.
Financiers will be using this information to assess what is the impact on their lending safety, which will be assessed against potential breaches of your approved loan terms.
Considerations include potential loan covenant breaches such as loan to value ratio on comp or loan to cost, the impact of project delays on an approved loan term, pre-sales risk on approved capitalised interest budget, approved loan term and project feasibility.
“We highly recommend you consider all of these factors in order for you to communicate your risk management strategy to your financiers,” DFP managing director Baxter Gamble said.
“This will help them become comfortable that you have considered and understood the risks, and they will be assured that you are already managing the risks well.”
Relatively minor potential breaches in approved loans are also likely able to be negotiated without too much stress or risk.
“More significant potential breaches of approved loan terms may need some higher level of strategic thought and advice required to vary, restructure or refinance your existing financing structure at both a group level and individual project level.”
“This is especially true if the majority of your loans are interlinked with the same lender.”
“Find out which of the three categories mentioned earlier that your financiers are in,” Gamble said.
“Ask them if they remain committed to settle any approved but undrawn finance approvals whether they be at indicative of formal approval stage?”
An early approach will enable developers to understand where they stand in order to obtain finance approval either as a backup if your existing financier can’t give you a firm undertaking that they will settle.
“Don’t leave this until the last minute especially if you have to settle a land purchase contract.”
What loans do you have that expire within the next 3-12 months?
Any loans that expire in the next year have re-approval risk.
How much risk do you have with the same lender?
How are your loan covenants tested and when are they due to be tested? i.e. revaluation (LVR’s) and loan servicing risk (ICR’s).
Any testing or scheduled reviews occurring within the next 12 months present a potential loan covenant breach which could trigger events of default and a cascade of other resulting risks.
Now is the time to create additional liquidity via releasing equity in your group’s assets into approved lines of credit secured against your passive assets (such as your residual stock, land assets or income producing assets).
Cash is king in volatile and opportunistic markets like we are experiencing now. Cash gives you the ability to solve all sorts of risk and be in a position to counter-cyclically invest.
This will ensure developers are able to take advantage all of available stimulus measures being progressively introduced by all levels of government.
Developing cashflow focused 30-, 60- and 90-day plans would be a valuable way to focus attention in a very scattered environment.
“Knowing where a business stands with its existing financiers and having access to as many alternative financiers has never been more important than now to ensure you are able to successful manage your financing risks,” Gamble said.
Several category three financiers have given DPF a mandate to grow the volume of new loans written during this period.
Development Finance Partners can assist with pragmatic and highly strategic risk management plans to help businesses work through the current challenging climate.
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