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Australia’s apartment supply forecast to plunge sharply

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Written by David Lovato – CPC Development Lending Solutions

 

Australia is suffering a housing shortage, with the national vacancy rate just 1.0%, according to SQM Research. To counter this shortage, and to cope with an increasing population and immigration, additional housing is needed. But not enough apartments are being built. 

Property advisory group Charter Keck Kramer estimates that 41,200 apartments will be constructed across the capital cities in 2023. But their estimates for the next two years are much lower:

  • 27,300 in 2024 
  • 11,100 in 2025

That would be a 73% national reduction in two years. Their forecast decreases in construction for the major cities are:

  • 87.8% in Brisbane
  • 83.5% in Sydney
  • 78.3% in Canberra
  • 65.3% in Melbourne
  • 65.2% in Perth

The reasons Charter Keck Kramer are forecasting fewer apartments will be built include:

1. Rising interest rates

The Reserve Bank has increased the cash rate for 10 months in a row. In March 2023, it was 3.60%, which is the highest rate since May 2012.

 

The Reserve Bank may increase the cash rate further, due to high inflation.

The Australian Bureau of Statistics (ABS) reported that annual inflation was at:

  • 7.8% for the quarterly measurement ending in December 2022 
  • 7.4% for monthly measurement up to January 2023 (this is based on a limited set of prices)

The Reserve Bank wants to reduce inflation to be between 2-3%. Although they see the slight decrease of 0.4 percentage points from December 2022 to January 2023 as positive, they are concerned the inflation rate will stabilise at a high level. To prevent this, the Reserve Bank may increase the cash rate again.

Rising interest rates affect developers in two ways:

  • Developers experience an increase in their borrowing costs
  • Buyers experience a reduction in their borrowing capacity, so may not be able to afford to buy these apartments

2. Rising construction costs

Residential construction has become more expensive because of:

  • A labour shortage – when Australia shut its border during Covid-19, it disrupted the flow of migrant workers, which still hasn’t been fixed
  • A shortage of materials – global supply chains were disrupted by Covid-19
  • Increased transport costs – transport costs rose 6.3% for the year to January 2023, while automotive fuel prices rose 7.5% (see graph), according to the ABS

3. Reduced profits

The combination of rising interest rates and construction costs has resulted in some developments no longer being financially feasible, according to Charter Keck Kramer director of research and strategy Richard Temlett.

“Rising rates are increasing project costs and also diminishing purchaser capacity and buyer demand, which is leading to slower presales in many projects,” he said. 

“Alarmingly, but not surprisingly, construction costs continue to increase and the residual supply constraints have resulted in many projects not being financially feasible. This will lead to certain projects being deferred or even abandoned.”

Temlett also said prices would have to rise. “Otherwise, developers won’t build it because of the heightened risk they are taking.”

So with increasing demand and fewer apartments being constructed, the supply of apartments may plunge.

Crowd Property Capital is a property development finance specialist. We help property developers overcome their funding challenges by sourcing loans for land, construction and residual stock. Contact us at [email protected] or fill in this form. 

Mezzanine vs Preferred Equity Financing

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Written by David Lovato – CPC Development Lending Solutions

 

The key ingredient in any property development is finance. Sometimes, the best way to finance a project is with a traditional loan. At other times, the developer may need to take a more creative approach.

 

In that case, the developer could consider applying for mezzanine financing or preferred equity financing. But which one?

 

Mezzanine financing

 

Mezzanine financing is secondary financing.

 

For example, if Developer A takes out a loan from Lender B to develop a property and needs additional financing, Developer A can ask Lender B for additional funds in the form of mezzanine financing or ask Lender C for mezzanine financing.

 

Lender C can only grant mezzanine financing with Lender B’s permission. Once the project is complete, Lender B will be repaid first, then Lender C and then only Developer A.

 

 

 

If there are insufficient funds to repay Lender C, the agreement Lender C has with Developer A will determine what happens next:

 

  • Lender C could take a share of Developer A’s project
  • Lender C could claim the property or part of the property
  • Lender C might book a loss, especially if Developer A is declared bankrupt and Lender B has claimed the property

 

Because Lender C’s position is risky, and subordinate to Lender B, mezzanine finance is often expensive and has strict borrowing conditions.

 

But there are several advantages:

 

  • Mezzanine loans are at higher loan-to-value ratios, so developers can access extra funding
  • Mezzanine loans may work out cheaper than forming a joint venture with another company to raise additional funds
  • The developer has to put less of their own money into the project
  • Repayments are often delayed until the end of the project, which helps with cash flow

 

 

Preferred equity financing

 

Another form of financing is preferred equity financing, which gives the lender an equity stake in the project, which usually involves a percentage of the project profits. With preferred equity, you surrender a stake in your project and give the lender a preferred pay-out position ranking ahead of the common equity shareholders.

 

 

In this scenario:

 

  • Lender B provides a loan to Developer A on a fixed interest rate at an agreed LVR
  • Preferred Equity Financier C loans funds that are secured against the borrowing entity  in the form of a project shareholding (rather than a registered second mortgage)
  • Preferred Equity Financier C is repaid a fixed rate or return and/or profit share at the end of the project ahead of Developer A
  • Generally Lender B will count the preferred equity funding as if these funds were Developer A’s own funds, which will allow better terms to be negotiated with the senior lender

 

Which is better?

 

With preferred equity financing, the developer gives a share of the project to the lender. This means the lender also has a share in profits earned. This ownership also gives the lender the right to interfere with the running of the project and ability to ‘step in’ and take control if things don’t go as originally planned.

 

In contrast, a lender that offers mezzanine equity financing does not automatically receive a share of the project as mezzanine is regarded as secured debt. So the relationship is very clear: the lender receives their principal and agreed interest at the completion of the project.

 

But if the lender can’t get mezzanine financing, then preferred equity financing may be a good option. That’s because getting only a portion of the profits is still better than not getting the project off the ground and earning nothing.

 

Crowd Property Capital is a property development finance specialist. We help you structure and submit your finance applications to lenders across Australia, whether you need a conventional mortgage, mezzanine loan or preferred equity loan. Contact us at [email protected] or fill in this form.

 

 

Ever thought about obtaining a grant for your development?

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Written by David Lovato – CPC Development Lending Solutions

 

Before starting your next property development project, consider checking if there are any grants or programs available from either the federal or local government.

An easy way to check is to use Business Australia’s (business.gov.au) grants and programs finder, which shows you all the current grants your business might qualify for.

When browsing the grants you should consider all aspects of your business and new development. For example, grants are available for:

* Research collaborations
* Projects that attract investment, sustainable jobs and growth opportunities
* Funding for weather-related events for small- to medium-sized businesses
* Support for small businesses to adopt digital tools
* Training new employees
* Security upgrades for small businesses

 

Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]

What developers should consider when starting a new development

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Written by David Lovato – CPC Development Lending Solutions

 

There are many factors a property developer needs to consider when starting a new development.

For example, if you want to finance a new development, you’d probably need to:

* Pre-sell the properties
* Apply for bridging loans
* Apply for specialised property loans
* Apply for personal loans

When assessing these applications, lenders could consider all or one of the following:

* You and your business’s credit history
* You and your business’s track record if you’ve developed properties before
* The business plan and viability of the project

Consulting a development finance specialist could help you:

* Make the right finance choices
* Get your development financed sooner by helping you with your application and business plan
* Potentially save you money by getting you better interest rates

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Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]

The Pros and Cons of Non-Bank Lending Explained

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Written by David Lovato – CPC Development Lending Solutions

 

As any developer knows, finding the right finance is critical to your project getting off the ground. But getting all the funds in place can be a time-consuming and frustrating process. With the RBA starting the rate rising cycle in May cheap commercial loans via bank funding are becoming more expensive and less attractive.

Non-bank lenders have taken a growing market share since the GFC as bank regulations tightened over the last decade.  This has lead to more competition which is great news for you, because borrowing through non-bank lenders offers some big benefits. Interestingly as bank lending tightened, non-bank lending loosened leading to a wild west mentality. Not all lenders are reputable, there are many pitfalls but doing deals with the best non-banks can be rewarding and will help you grow your business.

 

The advantages of non-bank finance

 

Non-bank lenders are typically privately owned and operated. So they can offer credit with fewer strings attached than traditional banks, such as:

 

  • Lower pre-sales requirements to start construction
  • Lower equity requirements, freeing up cash to drive your future development pipeline

 

What’s more, you get to deal with funders who understand property partnerships, repeat business and an entrepreneurial mindset. So they will generally approve or decline your application within days (not weeks or months like the banks).

 

Non-bank lenders also generally adopt a whole-of-business approach: they focus on the bigger relationship rather than the individual transaction. So If things don’t go to plan, you can work with them to ensure a win-win outcome.

 

 

What’s the cost of a non-bank loan?

 

Lenders charge various upfront and ongoing loan fees, so the cost of a loan isn’t just about the interest rate. The devil is in the detail, because steep charges and loan fees can eat into your profits, making your project unviable.

 

Three factors determine non-bank rates and fees:

 

  • The loan’s risk profile
  • The project’s profitability
  • The borrower’s financial strength

 

A word of warning. Some lenders are deliberately vague about the applicable fees and charges, leaving you to discover them for yourself after you’ve committed to the loan.

 

For example, many loans come with a discounted interest rate that reverts to a higher rate if the loan terms are altered without mutual agreement during the loan term.

 

So it’s vital you’re clear on all applicable fees, charges and conditions before you apply. A specialist development finance broker such as CPC can help with this.

 

 

Five common mistakes to avoid

 

CPC has heard countless horror stories of developers trying to save money by arranging finance themselves, rather than through a specialist finance broker.

 

This usually ends badly.

 

That’s because these developers often end up making mistakes such as:

 

  • Falling for too-good-to-be-true deals

Some non-bank lenders lure borrowers by promising them fees and interest rates that seem too good to be true. Sadly, these lowball offers are generally scams.

 

  • Getting overcharged

You should also be wary of lenders that charge large upfront fees or seek caveats on your property to secure their fees before getting started on due diligence. Reputable lenders charge only a nominal upfront fee (to make sure the borrower is serious), which then gets refunded at settlement.

 

  • Signing up for punitive penalty clauses

Watch out for clauses in offer letters or loan agreements that impose heavy penalties for breaches of loan terms.

 

  • Committing to long minimum interest periods

Be careful of loans that require you to pay interest for a minimum number of months, as you might end up being penalised for paying down debt early.

 

  • Working with fake lenders

Some unscrupulous brokers portray themselves as lenders and charge large upfront commitment fees. Once you’ve paid, they find excuses not to write the deal.

 

 

Why work with CPC?

 

Even the most experienced property developer finds it hard to choose the right non-bank lender and loan product. That’s because there are many lenders on the market, each offering different loan products, borrowing criteria, interest rates, and fees and charges. But you need to get it right, because you don’t want to make an expensive mistake that prevents your project from breaking ground.

 

That’s where CPC comes in.

 

We’re a specialist development finance broker, and have been arranging funding for our clients since 2014.

 

We work only with well-established, reputable non-bank lenders that have:

 

  • Operated through different market cycles
  • Got a strong track record for managing loans from beginning to end

 

So you can be confident the lender we find for you will have:

 

  • Sufficient funds available
  • Demonstrated cashflow management
  • A loyal, long-term investor base

 

CPC unashamedly charges a nominal upfront fee. This ensures we can dedicate time to your project, so we can better understand you and your objectives.

 

We can then match you to the right lenders, presenting your project in the best light so they are keen to win your business.

 

Download our in depth lending guide here to learn more about current rates and jargon used in the development lending space.

 

Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]

How to choose the right builder for your next commercial development

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Written by David Lovato – CPC Development Lending Solutions

 

Have you ever wondered what might happen if your builder went bust halfway through your project?

 

I have first-hand experience of this problem.

 

Back in 2009, during the GFC, I was a young project manager working for an ASX-listed developer, when a builder that was doing three of our projects entered administration. All our sites got locked overnight. It turned out the builder owed $30 million to their creditors. We were shut out of our projects for six months, until we were able to legally take back possession of the sites and engage a new builder. It was a costly lesson.

 

Why do I bring this up? Because the current chatter within the industry is that lots of builders are struggling to pay their bills right now, largely because construction costs are at their highest level in 21 years.

 

So the thing that happened to my employer all those years ago might happen to you too.

 

How to protect yourself from financial risk

Don’t choose a builder based solely on a Google search. There’s too much money at stake for that. Instead, do thorough due diligence.

 

Here are three steps you should take to minimise your risk:

 

  1. Check their financials

 

It’s perfectly legitimate to ask a builder to provide their most recent tax return and a consolidated cashflow forecast. Be wary of builders that are reluctant to provide this information. You want to understand who their other clients are and whether they’re properly resourced to manage multiple projects. You also want to find out how much revenue they’ve forecast for the next two years, because, with some builders, their cashflow might be destroyed if even one client refused to make a progress payment.

 

  1. Check their legals

 

It’s important to understand your builder’s company structure and class of licence. Be wary of builders that set up shelf or subsidiary companies for their building contracts. You should always understand who the directors are, and if they’ve had any insurance or legal claims against them, whether with this company or another one. Also, take the time to review the individual licence details of the nominated supervisor to make sure that person hasn’t had any historical compliance issues.

 

  1. Do a credit check

 

Engage a credit and risk assessment firm like Newpoint Advisory or Dun & Bradstreet to do a background check on any builder you’re thinking about engaging.

 

Don’t forget to do these background checks as well

There’s more to due diligence than just doing finance and legal checks.

 

When you research builders for development projects, you should also do these three things:

 

  1. Check for relevant experience

 

Of course, you want to choose an experienced builder. But you also need to make sure your builder is experienced in the specific project you’re planning. For example, if you’re going to develop apartments, don’t engage a builder that only has house experience. Choosing a specialist will mean your builder will understand the building codes and design issues relevant to your type of project, and will also know subcontractors with relevant experience.

 

  1. Visit previous projects

 

Any builder you talk to will tell you how great they are (and will probably have some nice-looking photos too). But you wouldn’t be conducting proper due diligence if you took their word for it. So take the time to visit some of their finished projects. Also, speak to building and strata managers to find out how responsive they’ve been when residents have moved in and they’ve been asked to fix any problems that have cropped up. That will tell you how committed they are to delivering quality work and maintaining their reputation.

 

  1. Talk to other clients

 

Ask your builder to provide contact details for two or three other clients. When you speak to those other clients, ask them what sort of quality the builder delivered, how they managed the project, what their service was like and how their subcontractors acted.

 

CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected].

Core Logic – Monthly Housing and Economic Update Sept 16

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The monthly update on the state of the national housing market has just been released. The key findings can be summarised as

  • Residential real estate underpins Australia’s wealth and has reached $6.7 trillion
  • The annual rate of capital gain has slowed from its peak but remains quite strong
  • Values continue to fall in Perth and Darwin on an annual basis whilst rising across the remaining capital cities
  • Turnover: capital city transaction numbers have continued to trend lower
  • The decline in capital city rents continues with asking rents down 0.5% over the past 12 months
  • Lending to owner occupiers and investors has started to pick-up again

To read the full report click here 

Harnessing Potential – Alternative Lending Market in Australia

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KPMG has commissioned a report undertaken by the University of Sydney’s Business School  of over 500 alternative finance platforms in 17 Asia-Pacific countries and regions, capturing an estimated 70 percent of the visible market. As the first comprehensive study of the Asia-Pacific online alternative finance market, this research contributes to the growing body of data supporting the region’s potential.

Click here to view the full report.

Some key questions about the marketplace lending in 2016:

  • Are individual or business borrowers using marketplace/ peer-to-peer lending because they have failed to obtain nance from banks, or in fact do they prefer the speed, flexibility and services offered by the alternative finance platforms?
  • Do businesses that raise finance via an alternative finance platform perform better in terms of profitability, revenue and job creation against businesses that rely on traditional funding channels?
  • From a credit analytics perspective, how are alternative finance platforms using new forms of data to ascertain the creditworthiness of borrowers?
  • Are platform credit risk modelling and underwriting facilities sufficiently robust – particularly in comparison with traditional finance providers?

Read more