Finance squeeze shifts focus

11/06/2018 - 15:53

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SPECIAL REPORT: Developers are exploring alternative funding methods due to a tough property market and tight lending conditions.

Finance squeeze shifts focus
Dave Wilson says a tight credit market prompted him to look beyond traditional financing. Photo: Attila Csaszar

The Western Australian property market has undergone a paradigm shift in how property projects are funded, according to director of apartment development business Norup + Wilson, Dave Wilson.

And he says that has probably been a good thing.

“In the past, the banks have had the lion’s share of the market,” Mr Wilson told Business News.

“It (the shift) means that there are now new players in the marketplace offering a range of benefits.

(click to see a full PDF of this four article special report)

“Whether the cause is due to the regulatory changes made by the Australian Prudential Regulation Authority, or the banks’ own policies, the effect is the same – private funders and overseas investment firms have quickly gained a significant market share.”

As a result of these funding changes, Mr Wilson said, private equity firms had funded two of his projects – The Crest in Burswood ($55 million funded), which comprises 168 apartments across 22 storeys, and the 192-apartment project The Precinct, Mount Pleasant on Canning Highway ($105 million funded).

“Despite the shift in the marketplace, we are continuing to work with the banks as a source of funding with the intention to maintain a diversified source of funding for our developments,” he said.

Traditionally, developers have secured loans after achieving a certain percentage of presales. However, stricter financing requirements and funding availability has put the pressure on developers in recent years, with banks often seeking presales of about 80 per cent before lending for construction.

Beyond the private investor realm, a superannuation fund has also taken an in interest in Perth. 

Last month, Sydney-based First State Super made its initial major property investment in WA, signing a $190 million funding agreement with Sirona Capital for its $220 million Kings Square Fremantle redevelopment, which largely comprises commercial office and retail space.

Parcel Property, which specialises in boutique apartment projects, has also gone beyond the presale model, indicating that it’s not just the big players approaching funding differently.

Part of Dale Alcock’s ABN Group, which has traditionally operated in the house and land market, Parcel Property was formally launched two years ago.

Executive general manager Andrew Auret said it leveraged the balance sheet of the ABN Group and operated under an owner-developer model – buying, managing, retailing and developing product – with partner builder PACT Construction.

He said the fundamental advantage Parcel Property enjoyed over most other developers was that the financial backing of Dale Alcock and the ABN Group enabled it to begin the construction of projects without having the need for presales.

This, Mr Auret said, provided more security for its target market of owner-occupiers, with the need for sufficient presales often resulting in project start delays and uncertain completion dates.

“For many purchasers the completion date is ‘When do I sell my home?’ so certainty it’s a big issue, particularly when dealing with downsizer clientele,” Mr Auret told Business News.

“I think the presales model is very difficult for Perth consumers because many don’t have a relationship with apartments; we’re dealing with a customer that hasn’t had that living experience.

“In our projects we’ll rush forward a display suite or demonstrate key elements like kitchens because we’ve found there’s a definite benefit with being able  to touch and feel.

“Low deposits are another part of our offering; if you’re a downsizer and you’ve got all the equity in your home, trying to find a 10 per cent deposit of a $600,000 apartment is a lot of cash. 

“This unique financing model also means we can offer deposits as low as $10,000 on our projects, simply because we don’t rely on the traditional banking model.”

Mr Auret said the team had also created a buyer’s guide with a glossary of terms for things like strata schemes and unit entitlements, with education a key part of its selling process.

Parcel Property completed its first apartment project, Fringe, in Mount Lawley last year, comprising 48 dwellings. It has two other projects currently under construction – the 23-apartment Edition Como development, and Carrington57 in Palmyra, a 24-apartment project.

“We’ve taken a measured approach to growth in the apartment market,” Mr Auret said.

“Perth will mature with infill development and if ABN still wants to build homes it will need lots of different offerings, so housing choice is part of why the Parcel apartment business exists.

“Yes the property market has been distressed, but thanks to those restrictive lending requirements there has been an undersupply in some of those key (suburban) locations.”

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