Private Credit’s SEQ Risk Radar Swings to Market

While construction capacity remains a key consideration for projects in the pipeline, private credit financiers are turning their attention to a more familiar foe: whether the stock will actually sell. Pindara Partners co-founder Daniel Erez says pre-sale hurdles are back on the table in the face of a nationwide cooling residential market. For much of the past few years, the dominant risk conversation in south-east Queensland’s development finance market has centred on builder capability, balance sheet strength and delivery. “Right now, market risk is back on the table as a major discussion point,” Erez says. Pre-sales hurdles back on the table And that change, Erez says, is prompting private credit financiers to reconsider how much unsold stock a project should carry as it nears completion, and to build in mechanisms that prevent that exposure from blowing out. Pindara Partners has exposure in Melbourne, Sydney and Brisbane markets, but its pipeline is heavily skewed to south-east Queensland. It predominantly plays in the mezzanine and preferred equity space, which Erez says is a less saturated sandpit to play in. ▲ Pindara Partners has provided funding for Molti’s Kangaroo Point development, which Graya is currently building. But as risk appetites change, Erez says financiers will most likely look to lock in pre-sale coverage against projected end values, rather than relying on assumptions made at the outset of a deal. And rather than a single pre-sale hurdle set once at financial close, he expects lenders to build in ratcheting requirements that step up through the life of a project—a mechanism designed to stop developers reaching completion still sitting on a large proportion of unsold stock. “I wouldn’t be surprised if you see [pre-sale hurdles] creep back up or start imposing hurdles throughout, so that you don’t get to the end and still have 60 per cent of it,” he says. Risk management critical in current market Erez says the approach is sound risk management rather than an overreaction, with broad agreement among private credit peers that avoiding a scenario where a project completes with a large unsold overhang is “the right risk mitigation strategy”. Some developers are still chasing finance options with no pre-sale hurdles, which Erez says is out of step with where lender sentiment is heading. Delivery risk remains part of the underwriting conversation. It is still a key consideration for Pindara Partners, and Erez says the delta between feasibilities coming across his desk and those that they finance still relates to construction delivery. He says it is specifically around who is building the project and how big the balance sheet is behind them. ▲ Bathla Group’s debt has surged past $3.4bn with lenders including Centuria Bass, PAG, CVS Lane and La Trobe Financial exposed, causing some anxiety among investors. Builder balance sheet under the microscope While builder-developers have been a backable market segment in the past few years, Erez says there is a difference between a developer that stood up a building arm to complete a project and a developer with a strong third-party builder. Capability alone, he says, isn’t enough without capital to support cost overruns. “Capability is really important, but right now, 5 per cent of cost overrun on your concrete or your steel—whatever—it actually proves that we end up having to pay for that,” he says. Erez says Pindara typically wants to see 50–60 per cent of a construction contract locked in before underwriting, allowing cost risk on the remainder to be sensitised and quantified rather than assumed away. Adding to the caution is a shifting rates outlook. Erez notes that several banks are now forecasting hikes in September or November, a reversal from earlier hopes of a cut. The lag in inflation data makes it difficult to gauge how much of the current reading reflects conditions from months earlier. Pindara’s response, he says, is to build margin and contingency into its underwriting rather than attempt to call the cycle. “We stress test our positions at underwriting and then progressively as well,” he says, modelling scenarios including forced discounting on sale and the flow-on cost of extended timelines. Taken together, the shift underscores a maturing private credit sector recalibrating its risk settings as construction-related uncertainty eases and market conditions reassert themselves.

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Taryn Paris
Wed 09 Sep 26

Private Credit’s SEQ Risk Radar Swings to Market

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