From agencies and advocates to health and travel industries, it seems that niche markets are stealing the show. And the property development industry is no different.
Recent results from a survey undertaken by debt financiers Solido Development Finance, illustrated that in 2019 non-bank lenders accounted for only 29% of lending, with the remaining 71% still being through major banks. However today, it appears the scales have tipped the other way. In 2021, this rose to 51% with the upwards trajectory appearing to continue. So what has been the catalyst for this shift?
It's fair to say there is often opportunity in the face of adversity and throughout the pandemic and global economic unrest, non-bank lenders have swooped right in and claimed it now more than ever.
Over the past year alone, construction has experienced a 15-25% rise in building costs due to a shortage in supply of both materials and labour which in turn, has pushed out completion schedules. The need to combat these rapidly rising costs and extended building programs has presented a significant risk and challenge to developers as re-pricing and re-negotiation of contracts has not only undermined the profitability of a project but in some cases its overall viability.
Mr. Michael Corcoran, Executive Director of Solido Development Finance commented, “The key to maintaining more control of these costs is timing; lock in a builder on a fixed price contract and secure construction finance as quickly as possible, prior to the commencement date of the contract. Further, pre-sales covenants are another one of the leading financing challenges for developers at the moment, however only 36% of respondents stated it as a major challenge today, versus 72% in 2019.”
However with major banks still taking 3-5 months to process and approve development financing applications, the need for “as quickly as possible” has led to developers seeking fast approvals from non-banks who often approve it within 2-3 weeks. Although highly regulated, they have less restrictions and requirements from authorities such as ASIC or APRA which also helps to expedite the process, and further, the interest rates offered are as much as 200-400bps lower than they were 2 years ago. Sounds too good to be true? Not really.
Mr Corcoran further commented on the current development environment and how non-bank lenders are helping developers navigate it.
“Our partner QS and company research has shown that not only have constructions costs already increased, they are forecast to continue on this trajectory over the next year. For example, a major frame and truss manufacturer who has wound down their production to 60% of normal capacity has had to increase their prices 25% due a shortage of available local timber and the inability to import it from overseas due to container shortages and shipping costs. There was also a major aged care development site in Sydney that tendered to 4 major builders and these all came back 35% higher than forecast a year ago. Developers need to adjust to these conditions by either succumbing to them and risking project profitability or hedge against them. Non-bank lenders such as Solido are able to help them do the latter with secure, fast finance and expert industry advice.”
Solido Development Finance is an established property development financier company who have been trusted partners for large scale projects such as the $22.2million dollar refinancing project in Paramatta NSW and $13.57million facility for 34 apartments in Cheltenham Victoria. They are a team of experts who not only understand finance but also construction and therefore offer expert guidance and optimal risk mitigation to ensure the success of every client project.
