Trilogy $700m fund races to restart work on Gosford apartment project

But while Trilogy, a $1.3 billion fund manager – with about $700 million deployed in the Trilogy Monthly Income Trust that is funding the Gosford development – plays down the risks of this project, it lays bare what can go wrong for buyers and investors in residential developments.

“We’re comfortable with the underlying security value,” Clinton Arentz, Trilogy executive director and its head of lending, told The Australian Financial Review. “But we do have an issue with the builder.”

The estimated cost to complete the work, which includes installation of the roof, guarantees and other costs was about $8.5 million on the project that had a valuation last year of $22.56 million, Mr Arentz said.

Buyers of the project’s presales to date – accounting for about 60 per cent of the project’s end value – could likely be persuaded to extend their sunset clause dates and even if they couldn’t, the units could be resold upon completion of the building, he said.

“We think the sales will stay in place,” Mr Arentz said. “There’s not enough apartment stock around the country. We like Gosford as a location. We think the market appetite is strong.”

The screws are tightening on residential developments born in a time of record-low interest rates as higher building costs and borrowing costs cut land values and estimated end values of developments while also cutting the ability of buyers to secure agreed funding when projects complete.

The Financial Review has seen market documents seeking a buyer for Trilogy’s $8.2 million loan to developer Cove and estimating a completion cost of $8.5 million. Mr Arentz, who said the costs were “in that order”, said Trilogy hadn’t been trying to sell the loan and it was not uncommon for developers to refinance.

“The borrower could be looking for additional funding solutions,” he said.

“They could be looking for a lender who might be capable of accepting a higher level of gearing than we’re prepared to give them.”

The estimated completion date of August 31 gives the loan a remaining term of just over 8 months.

Cove Developments director Anthony Mankarios said his company had made inquiries “to make sure we’re in the market”, but had decided to stick with Trilogy. The project had 15 presales and had signed a new builder, Mr Mankarios said.

“I’m sure one of our directors would have been checking around and looking around to see what’s fair and reasonable but we’re going ahead with Trilogy,” he told the Financial Review.

In Melbourne, retail investors in Australian Unity’s $500 million select income fund are set to take a loss on a half-built apartment project that the fund manager opted to sell, rather than keep funding, after delays pushed up costs.

The latest figures from corporate regulator ASIC show that as of November 19, there were 1122 construction-industry insolvencies, almost 29 per cent of the 3929 for the financial year to date. This is in line with the total a year earlier when – as of end-November – there were 898 construction industry insolvencies, or 28.3 per cent of the total 3178.

Over the same five-month period in 2021 – before the Australian Taxation Authority picked up its enforcement activity against companies that had outstanding tax obligations – construction accounted for 24.5 per cent, or 453, of the total 1850 insolvencies.

The number of funds with troubled projects was likely to grow, said Patrick William, the managing director of Rixon Capital, an asset-backed debt lender.

“Three to four months ago the view was we would have deep interest rate cuts in Q1 2024,” Mr William said. “The funds said ‘We’ll trade out of this, do a bit of restructuring and things will pick up in February-March 2024’. That’s looking very, very unlikely.

“We’ll start seeing funds having to bite the bullet in March, June and September next year and you’ll start seeing losses come through.”

Trilogy’s Mr Arentz, who said a recent valuation of the Gosford project put it at $22.9 million, said the TMIT fund, which required a minimum $10,000 initial investment, had a default rate of between 2.5-3 per cent and was hovering at the 3 per cent. This was likely to slip back towards 2.5 per cent after the impending completion of a few projects, he said.

If the delay on the Gosford project was kept to a few months, it wouldn’t affect its profitability, Mr Arentz said.

“If the delay is measured in months, that’s a manageable cost,” he said.