GFC ripple still holding back industry

ACCESS to finance for development projects in Western Australia has not yet recovered from the global financial crisis, according to prominent land developers and industry research.

Recent research by international property and construction consultants Davis Langdon showed nearly 60 per cent of financiers expect credit constraints to remain in place for 12 to 18 months, while developers were more pessimistic, expecting an 18 to 24 month wait for a recovery.

“We found that access to finance in the property and construction industry is a key concern,” Davis Langdon Australia and New Zealand research manager Michael Skelton said.

“Developers viewed the loan to equity ratios as very conservative and unworkable, particularly when combined with shrinking valuations and a lack of second tier finance, while the finance sector primarily cited a turnabout only when global markets became less skittish.”

The credit constraints are tipped to have dire consequences for a property market tipped to come under extreme population growth pressure over the coming decades.

Satterley Property Group managing director Nigel Satterley said up to 40 per cent of land delivered to market for housing in WA was produced by smaller, second tier developers that could no longer obtain finance.

“A lot of these developers used to go up to the bank and say ‘I’ve got a profit margin of 25 per cent, can you lend me 75 per cent?’ and that used to happen,” Mr Satterley said.

“Now unless you’ve got 50 per cent cash equity up front, you’ve got a long track record, you have very good financial controls and tight management, the bank won’t lend you the money.

“As you can see around Perth, the developers that are constrained have to do their projects stage by stage, or just can’t get credit.

“When you have a look at the last two years, 40 per cent of the developers are now struggling for credit, so the top tier developers, are supplying around 60 per cent of demand.

“What we can see is a land shortage coming.”

Aspen Living chief executive Chris Lewis agreed that it was the second tier developers that were suffering under the banks’ new credit regimes, which sparked land supply concerns.

But Mr Lewis said tighter lending requirements, even for the top-tier developers, would continue to constrain the market.

“I don’t think it matters whether you are a first tier or a secondary developer, the funding requirements now are around being able to achieve presales,” Mr Lewis said.

“What the banks are asking for is that you de-risk the project, so you de-risk that development activity.

“There is also a difference between a financier’s appetite for approved land and land that isn’t approved to date, and there is almost no appetite to finance land banks or areas of land that have significant planning challenges.”

Mr Lewis said the banks’ requirement for large percentages of pre-sales placed further undue pressure on land banks, with construction lags occurring between the time a lot is sold and it is delivered to market.

“We’ve got a situation where sales are ahead of inventory, because of planning, but there is a construction lag to develop lots and get them onto the market,” he said.

“Those pre-sales are unreported sales, and I think you’ll see that there has been price growth inbuilt into those presales that will be reported over the next six to 12 months.”

According to the Davis Langdon research, developers indicated they would consider moving away from domestic bank funding, with private syndicates, domestic private equity and offshore finance on their radar.

This has been illustrated by Perth-based developer Cedar Woods refinancing its debt, after its main financier Suncorp announced it was withdrawing from the development finance market.

Cedar Woods announced last month it had arranged a new three-year corporate finance facility with ANZ Bank, with a credit limit of $110 million.

Also, Port Bouvard used $20 million of the proceeds of its $60.2 million capital raising last November to permanently reduce the company’s borrowings with St George Bank.

Port Bouvard chief executive John Wroth said the banks’ appetite to increase lending in WA was “nowhere near where it used to be.”

He said a lot of speculation had gone out of the market at the bank level.

“This is very unfortunate because now is the time when prices have come right back on englobo land, there is a shortage upon us, there is a government that is willing to assist in improving the approval process and provide infrastructure, and at the heart of that critical pie is the banks and finance,” Mr Wroth said.

“That’s why we’re seeing alternative finance options becoming more common and we’re also seeing overseas finance and private equity becoming bigger players in the market.”