Sector Spotlight: Industrial Project Finance—July 2024

Another interesting six months in the development sector, but fortunately, one with minimal surprises and certainly nothing that caused HCP to revise its lending strategies.  

While the press continues to focus on inflationary pressures, housing affordability, the rental squeeze and interest rates, all of which are cause for considerable concern, the reality for HCP is that we have never been busier in terms of applications to consider.

This largely reflects the continuing rise of demand over a stifled supply chain. 

That said, while many of those applications struggle to get past the initial smell test and even more fall away in the following due diligence process, we continue to see a steady flow of qualifying loans roll out to our investors, much of it repeat business or introduced by way of referrals.

A common theme in HCP’s loan approvals over the past 18 months has been construction funding for industrial developments ranging in size from 4-24 product, targeting owner-occupiers and smaller distribution styled businesses.

▲ A development at Caboolture, north of Brisbane.

The industrial sector is one that we spent a bit of time reviewing prior to dipping our toe in the water 18 months ago but it is showing resilience and indications are that it will continue to do so for a while to come.

The primary attraction is the quick and uncomplicated building costs matched with strong sales demand ensuring quick exits via presales and or refinancing.

Research by the likes of HMW and Matt Gross’s National Property Research Co, have identified that there was a fall-off in building approvals post Covid, resulting in a reduction in supply.

This supply issue was exacerbated by the growth in the South-East Queensland population off the back of a continuing net migration from southern states and international migration.

As a result, vacancies are tight and rents are showing good returns for product coming on stream in the right locations, where the demographics support them.

This has helped underpin values after sales yields had softened following Covid.

▲ An industrial project at Redland Bay, south of Brisbane.

The Sunshine Coast in particular has shown itself to be solid, based on land prices and population growth in the corridor north of Brisbane but there are other locations also measuring up based on their demographics.

Aside from the obvious market drivers, these transactions are a good fit with HCP’s investor stated aims, consisting of smaller, uncomplicated builds, easy to price and not prone to significant cost overruns.

Delivery times are relatively short, tenants are showing strong interest prior to completion and the depth of the buyer market, comprising owner-occupiers and smaller SMSFs is often secured prior to completion to avoid competition.

The consensus seems to be that the current round of approvals is unlikely to exceed the existing levels of demand and result in the market overshooting, however, HCP’s approach of reviewing each transaction on its specific risks—including demonstrable demand and supply—are a key cornerstone to our decisions.

Better to be the second and possibly the third man to the party but definitely not the late comer. 

While these conditions prevail, it remains an attractive sector for HCP to participate in.

The economy

The impending US election has the potential to disrupt the US and Australian economies later this year, however it’s unlikely that the end result will have a significant impact beyond those already apparent such as rising importation costs.

HCP remains of the view that the rest of 2024 and early into 2025 will be characterised by a continuation of the current cautious conditions with at least one more rate rise remaining a possibility before we see the potential for an easing in the second half of 2025.

As a result, we see the flow of opportunities continuing in much the same way that they have over the past six months, with the first hurdle to satisfy after the initial project profile assessment being the sponsor, their reputation, experience and capacity to deliver and meet any financial hiccups.

You can view HCP’s Industrial Product Guide via this link.

If you would like to discuss funding for an upcoming industrial project or if you have any questions about HCP’s lending and investment offerings in general, please don’t hesitate to contact:

Dan Holden

Ph: 0401 669 502

Email: dh@hg.net.au

Gary Connolly

Ph: 0432 470 498   

Email: gc@hcp.fund

You can also visit HCP’s website, https://www.holdencapitalpartners.com.au/
 

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