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THE CHANGING WORLD OF NON-BANK FINANCING – WHAT IT MEANS TO YOU
The pullback by the major banks from development financing in Australia has been well documented in various reports and in the media over the last 18 months.
Similarly, the consequential development of the non-bank lending market is also a regular feature in the financial press.
With changes in the property market and potential tax changes making it even more difficult for developers to satisfy the normal requirements of both bank and non-bank lenders in relation to residential development financing, it has become necessary for both lenders and developers to consider alternative asset classes and deal structures in order for activity to continue.
In this edition of our Real Estate Investment Alert, we highlight some actual and potential developments in the non-bank lending space which may assist developers in formulating their short to medium term strategies in respect of future developments.
- Investment loans;
- Industrial and commercial property.
Investment loans are those used to purchase an income producing property, such as commercial office buildings or retail centres. Until recently, non-bank lenders tended to prefer construction and development loans rather than investment loans due to the higher returns able to be generated. The greater risk involved in construction or development finance allows for higher rates to be charged.
With reduced development activity in the residential space, non-bank lenders are now more open to provide investment loans, particularly where there may be an issue with the property which makes the transaction unattractive to a bank. For example, where:
- there is some vacant space,
- the WALE is short,
- some refurbishment is required, or
- some tenants are likely to experience some financial difficulty,
non-bank lenders may be more inclined to provide investment loans for the purchase of the property, as the added risk associated with the property will enable them to charge a higher interest rate than a bank (although lower than that applicable to construction lending).
The build-to-rent sector is be gaining more support in the Australian market. More developers are looking to enter into this sector. Large and experienced offshore operators of these types of projects are looking closely at how they can help kick-start the sector in Australia to create a substantial alternative property asset class.
The Labor party has indicated that, if elected, it will allow investments in these types of assets to be held by managed investment trusts able to take advantage of the 15% withholding tax rate rather than the 30% rate which would apply to them if draft legislation proposed by the current Government were to pass. This combined with the likelihood of low-interest rates continuing to be experienced in both Australia and overseas, (thereby making the yields available from this sort of asset more attractive) will make investment in build-to-rent properties more likely.
From a lender’s perspective, build-to-rent developments do not provide the certainty of being repaid (from the settlement of presales) available from normal build to sell projects. The means of repayment would generally be by way of refinancing by the borrower, which may not be possible or could be delayed.
Structures or products which minimise the refinancing risk may be developed by non-bank lenders which could increase the ability of developers to obtain construction finance for these types of developments. In addition, these types of developments are suitable for long term debt financing which is available from a number of non-bank lenders which are funded from offshore.
Traditionally, where a loan was too large to be funded by one bank, the lead bank would assemble a syndicate of banks which would each fund their proportion of the total loan.
This structure is now also being considered by non-bank lenders. As a result, for large transactions which were previously funded by a syndicate of banks (but for which such funding is no longer available), borrowers are likely to still be able to obtain such funding through a syndicate of non-bank lenders.
This is a new and developing area in which non-bank lenders are starting to participate and it will be interesting to see how it develops.
INDUSTRIAL AND COMMERCIAL PROPERTY
Unlike the residential sector, the industrial and commercial office sectors remain buoyant.
Developers looking to develop these types of properties should find it easier to source construction funding. These properties can be strata subdivided similar to residential property and sold.
If the properties are to be rented rather than sold, the refinancing risk referred to above in relation to build to rent properties would apply however, as these types of properties are more likely to provide certainty of income (due to the nature of the tenants and the terms of their leases), the refinancing risk should be less of an issue for a financier.
These types of developments are also attractive to long term debt finance providers which are funded from offshore which, as a result, should also minimise refinancing risk.
In the uncertain world we live in, it is important to be able to adapt to the environment and innovate. This applies equally to property development and financing as it does to other industries.
We look forward to seeing how the market develops over the course of 2019.
If you would like to discuss any of the above please feel free to contact us.
Peter Faludi Consulting
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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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