Apr 03 2017Add to Favorites
Developers face a tightening squeeze between bank lending shortfalls and an APRA crackdown on mezzanine or “quasi equity” lending, upon which developers are becoming increasingly reliant.
APRA recently sent a note to ADIs entitled “Commercial Property Lending – Thematic Review Observations” in which the regulator pointed out that a “general tightening of underwriting standards” that it had observed “over the last year or so” has not “been uniform” and warned the smaller banks to “ensure they are not unduly accepting greater risk as other lenders step back”. By “other lenders” the regulator is clearly referring to the big four banks.
The implied threat by APRA to take further steps to enforce a tighter lending regime is causing concern in the property sector. Steve Wiltshire, chairman of construction finance broker, HoldenCapital, puts it bluntly, that APRA is telling the lenders “guys we still don’t think you’ve done enough, we expect you to do more, and we’re watching.”
HoldenCapital’s own lender list tells the story of how developer funding has changed over the last 12-18 months. The list has grown from 97 lenders at the end of 2015 with the four majors accounting for 67 per cent of the $250 million in transactions that settled that year, to 164 in early 2017 after what the group describes as a “dramatic shift” through 2016.
In that expanded list the majors accounted for only 28 per cent of the $340 million in funding HoldenCapital arranged last year. “A quick review of the business settled for the 2017 first half sees that this has fallen to below 20 per cent and we don’t expect this will change anytime soon,” writes director Dan Holden in the group’s first quarterly report for 2017.
“The big gains have been amongst the investment funds and private lenders and demonstrates how the market is evolving to meet the demands of developers,” he writes. “While they are filling the gap left by the majors, many of these lenders have very restrictive loan requirements in order to manage their relatively small pools of capital.”
While new lenders have come into the market to help fill the gap left by the retreating big banks, they are not banks and the funds they are offering, in the form of quasi equity or mezzanine finance, comes at a much higher cost, 12-15 per cent.
Wiltshire states that the regulator wants the developer to have a greater equity stake to reduce lender exposure, and “if that’s the limit of his/her capital then maybe the deal shouldn’t be going ahead (in the eyes of the regulator).”
Until 12-18 months ago developers had only to put up 5 to 10 per cent equity to get bank funding, and this had been the case for several years in the wake of the GFC as the banks moved into the space once occupied by the mortgage funds and foreign lenders and increased their loan to cost ratio, offering attractive funding deals.
“Then, having secured a DA and maybe some presales to achieve an uplift they could go see the bank with a reduced equity requirement,” says Wiltshire. “Now all of a sudden, because of regulatory activity, the banks require 20 per cent to 25 per cent of the LCR from the developer. There’s a widening gap between what the developer can put up, and what the banks are demanding.
“While there is alternative funding around, it can be expensive. Developers have a choice: they can deal with the banks, but have to have the capital or utilise costlier mezzanine or preferred equity; or they can borrow outside the banking sector and pay more, which in both cases can reduce the viability of the project. Recently, we have accessed some new “stretch senior“ funding which will be attractive to developers who qualify for it as it will reduce the over interest expense.
“The regulator can only control the regulated banks, non-bank funders can do what they like, but we are seeing the market is generally regulating itself. We’ll get the odd disaster on the fringes, but currently the market is not over-heating.”
SOURCE: Feature Article
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