Property developers are increasingly relying on non-bank finance to fund their projects.
A DECADE ago, it would be unusual for a Western Australian developer to fund their project via any avenue than one of the major banks.
Now, however, it is almost standard practice for proponents to look to alternative lenders to fund at least part of their development.
The market share of non-bank finance has increased from 8.7 per cent of Australia’s $408 billion commercial real estate debt market to 10.5 per cent in the four years to June 2022, Australian Prudential Regulation Authority figures show.
During this period, the value of non-bank real estate loans has grown by 56 per cent to $42.7 billion, APRA found. In contrast, the major banks have increased the value of their real estate loans by 19.6 per cent in this time.
Results from the country’s big four banks show a declining exposure to commercial property in recent times, with Commonwealth Bank of Australia’s 2023 half-year results showing its exposure to apartment developments is 55 per cent below the last peak in 2016.
And National Australia Bank’s 2022 full-year results show its loans and acceptances across commercial real estate dropped by 0.1 per cent in the 12 months to September 2022.
Market volatility, an increased acceptance of alternative lending and tighter restrictions on banks, are among the factors leading to the sector’s growth.
In WA, there’s increasing choice for developers and property funds to source lending outside of traditional banks.
MaxCap Group, which entered the WA market in 2019 after launching in Melbourne 11 years earlier, is working closely with developers and property funds in Perth.
The national debt provider has about $7 billion funds under management, with about $250 million currently in WA, with those figures fluctuating as loans complete.
Justin Pearce started as MaxCap Group state director for WA and South Australia in August last year, after more than a decade at the Commonwealth Bank.
He told Business News developers were gravitating towards alternate lenders for the speed and flexibility they provided.
“We look at transactions on a case-by-case basis. We may say we like the location, we like the sponsor [borrower], the builder … [so] we’re prepared to take a lower presale coverage initially,” Mr Pearce said.
“That will allow a developer to move quicker.” Perth apartment developer Iris Residential has borrowed from MaxCap for three of its Perth projects, including its recently completed Amara City Gardens development in Booragoon.
The financier has also helped fund Royal Oak Capital’s purchase of a West Leederville office building last year, which the Perth group bought with a view to upgrade.
Iris Residential’s Amara City Gardens project in Booragoon.
Debt equation
Non-bank lenders generally offer lower loan-to-value ratios than major banks, meaning borrowers are required to chip in less equity up front.
APRA’s requirements on banks to tighten their lending criteria following a review into commercial property lending in 2016 became a catalyst for growth in the non-bank space, industry experts say.
The trajectory of MaxCap’s growth reflects this trend, as chief investment officer Bill McWilliams explained.
“MaxCap is 15 years old, but it’s predominantly been over the last six to seven years where the majority of the growth has come from, and that’s really been brought about by a dislocation in the banking market,” Mr McWilliams told Business News.
“[When] APRA started to apply heavier capital restrictions on the banks for property lending … it created a lot of opportunity for our group.
“More and more we are competing with the banks.”
Current uncertainty around apartment developments, with the postponement or cancellation of projects, had created jitters amongst potential buyers, he said.
“We are speaking to a lot of developers who are asking for lower presales than what the banks would allow for that exact reason; it’s hard to sell off the plan right now,” Mr McWilliams said.
“There are less investors in the market, so velocity rates are slower.” He added buyers were more likely to commit once work was under way on a development.
Often, non-bank lenders will act as a stop gap between themselves and mainstream banks, by providing bridge finance to borrowers.
Centuria Bass Credit founding partner Nick Goh, who helps manage the group’s $1.1 billion of assets across Australia, explained that bridge loans worked across a number of property assets.
“An example would be a commercial asset that’s newly built but isn’t yet fully tenanted, and once its fully tenanted and generating all its income can obtain standard bank finance,” Mr Goh said.
In Perth, Centuria Bass Credit loaned to Northbridge entertainment venue Metro City during COVID, when the banks considered hospitality assets high risk.
“We were able to look at that situation and say, ‘this is valuable real estate’,” he said.
“It doesn’t matter that there’s a temporary downturn in income or trading, we can look through that lens against the asset, and that’s been a successful loan for us.”
Centuria Bass Credit operates about $60 million assets under management in Perth and is aiming to add about $200 million to its WA portfolio in the next 12 months.
Perth property veteran Garry Brown Neaves’ BN Investments is rapidly growing its private debt arm, whereby it partners with other alternative lenders to provide first mortgage finance.
BN Investments chief operating officer Brad Headling said the business segment was a natural progression for Mr Brown-Neaves, who has a sizeable bank of land developments.
“Given Garry’s other investments across multiple land subdivisions, it became a natural stepping stone,” Mr Headling said.
“Not all developers can get big-four-bank funding, some of the [developments] we were in couldn’t get big-four-bank funding, so we went down the path of lending funds for construction and subdivision and it evolved from there.”
Centaur is financing a $10 million Subiaco apartment development.
Black swans
Given non-bank lenders’ arguably higher risk appetites and ability to move more quickly than mainstream banks, the sector often comes to the fore in times of global uncertainty.
Mr Goh explained that banks changed their credit policies in response to economic conditions, providing opportunities to alternative lenders.
“There’s been an ability of private lenders to be that white knight more recently, particularly through events like COVID, the floods in NSW, the war in Ukraine,” he said.
“All of those issues lead lenders to reduce loan to value ratios, and what we’re able to do is provide that gap funding to borrowers that are in need.”
Mr McWilliams explained that this phenomenon reflected MaxCap’s low penetration of the industrial property market, currently considered the favoured asset class.
“If the banks turn around and say ‘we don’t like this anymore’, [if] something happens to the market, there’s an opportunity for us,” he said.
Mark Darling’s business has experienced steady growth in the past decade. Photo: David Henry
Efficiency
Perth non-bank lender Centaur Property Funds Management has raised $1.38 billion across 260 investments, funding more than 6,700 residential dwellings, in its decade of operation.
Centuar’s managing partner, Mark Darling, said non-bank landing had gained greater acceptance in the marketplace during the past 10 years.
“Banks dominated in the 2010s, but with the increasing regulatory environment banks can’t be as flexible as what non-banks can be, and that’s what driven the growth,” he said.
“As we become more accepted … there’s more demand.
“We are not there to replace banks, but there are things we can do that differentiate us, and it comes down to structuring funding and being flexible.”
Golestani Developments director Hootan Golestani drew on Centaur for his $10 million apartment project on Rokeby Road in Subiaco.
He said he preferred this method over a big bank for its speed, flexibility and local approach.
“It was quite evident in the early stages of our discussions that the ability by Centaur to keep all of their credit decision-making local avoided the unnecessary delays or misunderstandings of our market and economy that we are constantly exposed to by credit departments located and focused in the eastern states,” he said.
“The response and knowledge of Centaur was critical, allowing us to ensure the commercial viability of the development.”
And given the changing nature of the market – with buyers keen to downsize into apartments but reticent to commit to presales – using a non-bank made sense, Mr Golestani said.
He said retaining stock meant he could attract higher prices in a strong market and better engage with buyers resistant to purchasing apartments off the plan.
Reputation
The fact the non-bank lenders are not subject to APRA regulations, as the major banks are, has led to some scepticism over the security of the asset class.
Instead, these providers operate under financial services licences, which legally bind them to providing fair and honest services.
Mr McWilliams said while there were always some bad apples, it was important consumers didn’t lump alternate lenders in the same box.
“There is less regulatory oversight in the non-bank space … but it’s important that non-bank lenders are doing the right thing,” he said.
“There will be in any industry … some bad eggs … but it’s important people don’t taint the non-bank industry as one big industry and think everybody’s the same, because we’re not.
“We are like any other industry where you’ve got players that have been around for a long period of time [and are] well established.”
He added that MaxCap’s reputation had helped it attract a growing calibre of borrowers in recent years.
