After a record rise in interest rates, amidst global economic uncertainty, never-ending stories of builders going broke and new projects getting shelved, we once again find ourselves in an environment of tightening credit availability for property developers.
Even some of the most prominent fund managers, who have written billions in the past few years, are facing capital constraints.
With less capital available in the market, developers are finding it increasingly challenging to secure deals.
Having come out of a long period of plentiful capital looking for a home, it’s been quite some time since prospective borrowers even thought to ask whether lenders actually have the money that they’re promising on an Indicative Terms Sheet (ITS).
“Where is your money coming from for this deal?” has become a very regular question in the STAC Capital office. We’ve heard too many stories from fund managers (‘fundies’) about being approached by other fundies, either asking for help to chip in on a deal they don’t have money for or simply trying to hand over a deal. We’ve seen some fundies be open and honest about the fact that their doors are closed or restricted, whilst others have been less so.
Do they have the necessary funds on-hand before issuing an ITS or do they issue it and then scramble to find the money? Are they operating under secure mandates from their investors?
While understanding the source of funds is important, other factors are further complicating the landscape.
Construction delays have been a significant issue for some lenders. For instance, if a loan term is written for 18 months but repayment is delayed due to construction time frames dragging out, fund managers are unable to get the capital and returns back to investors as promised. Similarly for projects being shelved—if a loan was written on a development site but the project doesn’t proceed to construction how does that site loan get repaid?
If you were an investor into a loan and you didn’t get your money back as and when expected, would you be keen to invest even more again?
Funnily enough, even the huge institutional investors often think the same way you probably just did to that question.
But beyond construction and development industry challenges, broader global economic challenges are influencing investor behaviour.
Adding to these challenges is the current economic uncertainty occurring worldwide, leading many investors to be more focused on “capital preservation”, rather than the “chasing yield” that most did over the past few years.
With many investors hesitant to provide further capital until they see returns on their existing capital that’s still out the door, even many of the largest fund managers are lacking available capital for new projects.
Whilst many existing players are struggling to find money, we’ve continued to witness the emergence of new funds—a mix of family offices coming afresh into the debt market, along with key staff of fund managers jumping from one shop to another or starting their own new shop.
If developers aren’t able to keep pace with these changes, they risk jeopardising their access to reliable capital.
In light of these challenges, what’s the key to navigating this complex landscape?
The answer lies in understanding the dynamics of debt capital markets and having relationships with many lenders to be able to source terms from, even if the better-known ones aren’t willing or able. The current finance market situation underscores the importance of staying informed, adaptable, and connected.
As an example, we were recently negotiating a circa $30-million structured multi-tranche deal. It would have been a highly competitive process in early 2022—but in the current environment, we had to pitch to some 35 lenders in order to get three genuine competitors to the finish line.
As a developer seeking to borrow, whether you’re sourcing the funding yourself or using a broker, make sure that due diligence and research have been done on the lender’s capacity and track record.
At STAC Capital, we pride ourselves on the relationships we maintain with a broad range of lenders, across our extensive network of more than 300 non-bank lenders, ranging from wealthy individuals and boutique fund managers, through to large fund managers and global institutions.
Our active involvement in the market spans deals of all sizes, from single dwelling luxury spec homes through to high-rise towers and multi-stage projects, covering various asset classes such as industrial sheds or office buildings, and specialised going-concerns such as childcare centres, retirement villages, and medical centres.
Beyond just senior debt (first mortgage), we regularly write mezzanine debt (second mortgage) and preferential equity tranches.
In the wake of escalating interest rates, worldwide economic instability and increasing cases of property developers facing financial difficulties, there’s a noticeable crunch in credit availability. Notably, even major fund managers, who have been significant stakeholders in the past, are now grappling with capital limitations. As a result, property developers are struggling to finalise deals.
Several issues are complicating the scenario:
Questionable Fund Availability: A growing trend is the inquiry into whether lenders genuinely possess the capital they promise, leading to scepticism about their funding sources.
Construction and Project Delays: Prolonged construction timelines and shelved projects affect lenders and fund managers, as they can’t repay investors timely. This creates reluctance among investors to reinvest.
Global Economic Influences: External economic challenges are shaping the way investors think, with many choosing capital preservation over yield chasing.
New Entrants: Despite these challenges, new funds and entities are emerging in the market, making it vital for developers to stay updated.
Navigating the Landscape: To find success in this evolving situation, developers must remain informed, flexible, and maintain connections. It’s pivotal to understand the debt capital markets dynamics and to build relationships with multiple lenders.
STAC Capital emphasises its diverse relationships with more than 300 non-bank lenders, playing a pivotal role across a range of deals and sectors, reinforcing the importance of lender research and due diligence.
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