Non-Bank Lenders Improve Developers’ Return on Equity

Flying in the face of conventional thinking, lower levels of presales are proving a blessing for developers after a record year for property prices

During 2021 apartment prices increased at the strongest annual rate in 11 years, up 12.6 per cent across capital cities, according to Corelogic.

However, long lead times trying to achieve bank pre-sale hurdles were hindering development profit with apartments worth substantially more closer to a projects’ completion than at launch.

This, coupled with surging construction costs and supply lag in the past 18 months, has led to substantial changes in developers’ bottom line.

The mid-term forecast for property is still positive, particularly for apartments, with border re-openings, a drop in lockdowns, and continued Government stimulus.

Payton Capital’s NSW and­ QLD Manager Brett Brisco said non-bank lenders had been quick to realise this and had stepped in to bring projects forward through higher leverage and lower pre-sale requirements.

“The market is buoyant particularly across Sydney and Melbourne, and what we are seeing is across any given project the value uplift from its commencement to finalisation is anywhere from 10 to 20 per cent in some areas,” Brisco said.

“When you model that back into the underlying project profitability and feasibility you find you’re actually contributing a significant uplift to the overall return in the project.”

Brisco said developers were seeing the benefit of using non-bank lenders to fund their projects. Their appetite for higher leverage means a lower equity contribution is required by the developer, which is typically the most expensive component across the capital stack. When a developer factors timing and efficiency gains together with likely value uplift on unsold stock, the return on that equity contribution can be almost doubled.

“What it can also facilitate, is potentially multiple projects at any given time, as opposed to the more traditional model of one project from start to finish,” Brisco said.

“We can actually facilitate an acceleration of a development pipeline and help developers realise their goals and objectives quicker by bringing projects that otherwise would be timed out or deferred forward.

“Another key advantage of where we can improve returns is through less restrictive conditions, such as presales.

“What that will allow the developer to do is benefit from any uplift in value through the project’s construction phase. It also helps to mitigate any inflationary fallout, including the higher than normal escalation of construction costs which we’re currently seeing”

“These are just some of the benefits of aligning with a trusted capital partner”, Brisco said.

Payton Capital, an emerging non-bank lender, recently launched in Sydney in order to service the growing demand from their clients in the region, whilst also capitalising on Brisco’s decades in the local market, and the company's long tenure in Melbourne.

Supplementing a strong team of local bankers in NSW, Payton has also embedded property specialists in construction and development management to provide a sounding board for its developer clients.

Non-bank lending has continued to surge during the pandemic, becoming a popular first choice for developers providing greater structuring ability, higher leverage opportunities and faster credit approvals.

Main image: Payton Capital funded ‘Jabiru’ in Ettalong Beach

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