Lenders warm to residential projects as boom looms
Lenders have been steadily reducing the pre-sale requirements imposed on residential developments as they compete for opportunities in the coming housing boom, according Stamford Capital’s latest survey of the sector.
While the major banks have been relatively wary of providing construction finance in the past few years, 46 per cent of respondents expect them to increase commercial real estate construction loan activity this year, according to the Stamford survey.
However, non-bank lenders are still likely to dominate this area – with 73 per cent of respondents expecting non-banks to increase their construction loan activity.
The renewed appetite for construction is likely to lead many banks to reduce pre-sale requirements or eliminate them altogether, which is a significant shift from their previous, more conservative stance.
Last year, 53 per cent of survey respondents had a pre-sale hurdle of 35 per cent or less. This year, 71 per cent require 35 per cent or less – and29 per cent have no pre-sale requirement at all. Lenders typically set pre-sale hurdles as a way of mitigating risk in large apartment projects.
“Basically, a lot of the major banks are actually now accepting more deals,” Stamford’s managing director Peter O’Connor told The Australian Financial Review.
“Banks were playing at the 60 per cent to 70 per cent level [of pre-sales required] but they are moving down to that 30 per cent to 35 per cent range. We’re seeing a lot of deals at that level, whereas historically that just wasn’t the case.”
Stamford Capital brokers commercial property finance and conducts its Debt Capital Markets Survey annually, assessing sentiment among major bank lenders and private credit providers.
Construction costs remain high and tradies are in short supply, making more affordable projects harder to stack up. So developers are focusing more on luxury downsizer-style projects, according to O’Connor.
Even so, the competition among lenders who are now more bullish on the residential sector comes as interest rates begin falling. As a result, 62 per cent of the survey’s 100 respondents expect credit requirements to loosen and for loan margins to decrease across the board.
“I definitely think that they’re looking to be more competitive, given the growth in their loan books is under pressure, and also think that they believe in the strengths and the underlying fundamentals in the sector, especially with the rates trading downwards, most definitely,” O’Connor said.
He described falling interest rates as a “double whammy” in a positive sense for the property development sector.
“Decreasing rates generally increase asset prices, which is great for feasibility. And also a decreasing rate actually reduces the cost burden on projects, so more projects actually become feasible,” he said.
Stamford Capital’s own data shows a significant reduction in loan margins already, falling by up to 50 basis points over the last 12-18 months, to “their lowest in recent memory”, according to O’Connor.
“We’re currently seeing line fees and margins align at 200 basis points, whereas 12 months ago they were sitting at 240 and 250 respectively,” he said.
The survey also reflected the increased attention on the private credit sector, which has now swelled past $200 billion, prompting the Australian Securities and Investment Commission to increase its surveillance.
More than two out of three lenders in the survey signalled concern over the size and practices of Australia’s private credit market. While that registered higher among bank lenders at 86 per cent, it was clocked at a substantial 60 per cent level among non-bank lenders.
Almost half of all respondents called for increased regulation of non-bank lenders.
“Private credit fills a critical gap in the market, and there is potential for heavy-handed oversight to stifle the sector’s growth. While concern is elevating around the lack of compliance and regulation in the non-bank lending space, we do deal with many established and sophisticated counterparts in the non-bank space,” O’Connor said.
