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Property finance in Australia – who’s doing the heavy lifting?

The major Australian banks have made a strategic withdrawal from funding commercial property development in Australia. Previously the major banks had a market share of circa 85 percent  of the $50 billion annual property finance industry. Now, with concerns about market concentration, reported over-supply of apartments and capital adequacy requirements of the Reserve Bank of Australia and the Australian Prudential Regulation Authority, this market share is expected to be reduced to around 75 percent.

Banks are effectively cherry picking the best deals on offer to ensure that they minimise their exposure to a significant market correction or lessening of values which is currently being experienced in the Australian property market. This is making it increasingly difficult for developers to source suitable construction funding to launch their projects and as a result, there have been quite a number of projects which have been shelved.

One such project was the sale of a proposed residential conversion at 555 Collins Street, Melbourne which was intended to have approximately 500 apartments. This project was put on hold as it only achieved 46 percent sales more than a year after the launch of the project. Similar scenarios have been experienced around Australia where developers considered it unviable to proceed with the development, mainly due to insufficient qualifying presales to satisfy the financiers presale coverage requirements.

Non-bank financial institutions pick up the slack

The withdrawal from the major banks opens up a significant opportunity for non-bank financial institutions (NBFIs) to enter the market and take up the shortfall in funding.

NBFIs are making substantial inroads in funding the void in property finance requirements with the likes of Wingate, MaxCap, Qualitas, Gersh, Banner Asset Management, and a number of Asian-based financiers who have been able to source considerable investor funds in order to fund these proposed developments.

Whilst the costs of funding are somewhat higher than the rates traditionally offered by the banks, developers with a sound project can factor these increased funding costs into the overall project costs and are still satisfied with the slightly reduced return, which is a better outcome than not proceeding with the project at all.

Moving forward

There is evidence of a substantial reweighting for funding appetite for commercial property development finance in Australia which is only likely to continue for the foreseeable future. Developers are advised to shop around for their funding requirements and look to NBFIs as a viable option. Funding should be considered well in advance in the life-cycle of the project, as obtaining all requisite approvals is now taking much longer to procure.

Authors
  Ian Beattie | Partner
+61 3 9258 3689
ian.beattie@maddocks.com.au
Michael Zheng | Senior Associate
+61 3 9258 3393
michael.zheng@maddocks.com.au

The major Australian banks have made a strategic withdrawal from funding commercial property development in Australia. Previously the major banks had a market share of circa 85 percent  of the $50 billion annual property finance industry. Now, with concerns about market concentration, reported over-supply of apartments and capital adequacy requirements of the Reserve Bank of Australia and the Australian Prudential Regulation Authority, this market share is expected to be reduced to around 75 percent.

Banks are effectively cherry picking the best deals on offer to ensure that they minimise their exposure to a significant market correction or lessening of values which is currently being experienced in the Australian property market. This is making it increasingly difficult for developers to source suitable construction funding to launch their projects and as a result, there have been quite a number of projects which have been shelved.

One such project was the sale of a proposed residential conversion at 555 Collins Street, Melbourne which was intended to have approximately 500 apartments. This project was put on hold as it only achieved 46 percent sales more than a year after the launch of the project. Similar scenarios have been experienced around Australia where developers considered it unviable to proceed with the development, mainly due to insufficient qualifying presales to satisfy the financiers presale coverage requirements.

Non-bank financial institutions pick up the slack

The withdrawal from the major banks opens up a significant opportunity for non-bank financial institutions (NBFIs) to enter the market and take up the shortfall in funding.

NBFIs are making substantial inroads in funding the void in property finance requirements with the likes of Wingate, MaxCap, Qualitas, Gersh, Banner Asset Management, and a number of Asian-based financiers who have been able to source considerable investor funds in order to fund these proposed developments.

Whilst the costs of funding are somewhat higher than the rates traditionally offered by the banks, developers with a sound project can factor these increased funding costs into the overall project costs and are still satisfied with the slightly reduced return, which is a better outcome than not proceeding with the project at all.

Moving forward

There is evidence of a substantial reweighting for funding appetite for commercial property development finance in Australia which is only likely to continue for the foreseeable future. Developers are advised to shop around for their funding requirements and look to NBFIs as a viable option. Funding should be considered well in advance in the life-cycle of the project, as obtaining all requisite approvals is now taking much longer to procure.

Authors
  Ian Beattie | Partner
+61 3 9258 3689
ian.beattie@maddocks.com.au
Michael Zheng | Senior Associate
+61 3 9258 3393
michael.zheng@maddocks.com.au