REAL ESTATE INVESTMENT ALERT NO. 6

REAL ESTATE INVESTMENT ALERT NO. 6

Recent Developments in Property Finance.

Current trends

The options available for property investors and developers to obtain finance for their Australian acquisitions and projects are constantly changing.

Due to both regulatory and market factors, the Australian property finance market has moved from being largely dominated by the major Australian banks to one in which those banks are now limiting their property finance offerings. This has opened up the market to other financiers.

Although the market has always had some non-bank participants, offering both senior and mezzanine (or second ranking) debt as well as equity for property transactions, up until recently the number of such participants were relatively few.

The increased number of non-bank lenders now in the market is due not only to the pull-back by the local banks in offering property finance but also the global search by investors for yield/returns. With interest rates continuing to be low in most countries around the world, investors are hungry to tap into the relatively secure and higher returns available from property finance.

The pullback by the banks has improved the risk profile of the deals available to non-bank lenders. Traditionally, property investors generally only sought finance from non-bank lenders in respect of the more risky or difficult transactions for which they could not obtain bank finance. The banks’ lack of appetite for property finance transactions, particularly for development or constructions loans, has meant that the non-bank lenders are now able to be involved in less risky transactions, thereby making provision of such finance more attractive.

As a result, the Australian market now has a wide variety of non-bank lenders looking for good property deals requiring finance. Indeed, based on comments we have received from a number of non-bank lenders, there is currently more money looking for property finance deals than there are borrowers looking for money. This is a 180 degrees turnaround to what the market was like only a few short years ago.

Who are the participants in the non-bank lending space?

The range of non-bank lenders operating in Australia include domestic and foreign high net worth individuals, private equity groups, funds established for the purpose of providing property finance and industry superfunds. The types of loans they make also vary and extend to some or all of senior, stretched senior, mezzanine and equity finance.

The interest rates charged are generally higher than that which would be charged by a bank (if bank finance was available) and vary depending on a number of factors including:

  • the source of the moneys to be lent;
  • the nature of the particular transaction and loan;
  • whether the borrower has an Australian track record; and
  • the security being offered.

One of the benefits often found in dealing with non-bank lenders is that they are better able to understand the underlying economics and benefits of the deal relative to some banks and can often turnaround matters in a more timely manner than a traditional bank. These aspects can be of significant importance to borrowers.

We are fortunate to have good relationships with a number of non-bank lenders and can assist clients with introductions to such lenders if requested.

The future

While current regulatory and market circumstances continue, the number of non-bank lenders is likely to grow, thereby increasing competition in that market. This may have a positive impact (from the borrowers’ perspective) on interest rates charged by non-bank lenders.

With the large number of non-bank lenders currently operating in the market (with possibly more to come), there is likely to be more segmentation among them resulting in various lenders specialising in different segments of the property market, different size loans and possibly offering longer-term debt. This already exists to some degree.

There may even be some M&A activity in relation to such lenders with offshore investors acquiring domestic non-bank lending platforms and consolidation among the participants in the market.

We will closely watch further developments in this market to ensure we provide up to date information to our clients looking for finance.

 

In keeping with our aim to assist investors minimise the stress involved in Australian property transactions, we trust you have found the above information useful. Please feel free to share this email with your business network and to contact us to discuss how we can work with you to improve your investment outcomes.

 

I welcome your feedback at peter@peterfaludiconsulting.com.au

 

Peter Faludi Consulting

Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.

 

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