Property developers are doing it tough as banks keep the sector on their watch lists.
IT’S no secret that funding pressure has been extreme for many in the business sector since the global financial crisis erupted more than a year ago.
But as the rest of the economy raises its head above the ramparts and gets back to business, property development remains well and truly on the nose of financial institutions that once courted the sector.
In some ways, the excess of property’s boom years has created a debt bulge that needs to be worked off. And ‘work outs’, as this careful management of troubled clients is called, appear to be just as strenuous as their physical counterparts.
For instance, sources suggest that as much as $1.2 billion of Westpac subsidiary St George Bank’s $3 billion commercial property portfolio in Western Australia is subject to work outs, a very high proportion compared to other major banks, which all have their own problem cases.
This scenario, which appears plausible when Westpac’s accounts and market updates are analysed, is just one cause of the funding pain, which has largely been borne by property developers since the GFC turned their world upside down.
Bankers agree there has been reluctance to act too quickly on developers that have defaulted or breached covenants.
“Banks are more willing to work through clients rather than pull the pin on them and put half-built assets on the market,” Duncan Caldwell, ANZ state director institutional property group for WA, said.
Nevertheless, Mr Caldwell senses that improving market conditions mean that banks are becoming less patient with troubled assets.
This may be good news to those with capital who have sat on the sidelines awaiting bargains, and been disappointed.
As tough as this may all seem for the clients caught up in them, it is very clear that work outs are part of a national strategy to avoid a repeat of 20 years ago, when bank foreclosures caused massive pain in the market and left the industry in tatters for most of the 1990s.
As a result, there have been few cases of actual collapse.
At the extreme end of the scale was SAS Global, a local syndicate land developer that collapsed late last year. It was preceded by Saville Australia, developer of the Emu Brewery site, which collapsed eight months earlier.
There has also been a trickle of less dire news, with sporadic reports of covenant breaches and the like, which appear to be part of the work outs taking place across the sector.
Developer Luke Saraceni is adamant he has the backing of his banks in his fight with builder Salta over the huge Raine Square development in the CBD, but his financial troubles also include the Port Geographe project near Busselton where the joint venture’s financier claimed debt covenants have been breached. Mr Saraceni shares that development with Macquarie Bank and Axiom Properties.
Then there were the dramas surrounding Port Bouvard. Late last year, it refinanced $167.6 million in debt, some weeks after the expiry date had lapsed, and its shares have remained suspended since that period.
These few public cases – with St George linked to several of them – are just the tip of the iceberg according to many banking and property sources, with numerous other developers silently trying to keep their businesses afloat with the assistance of banks that want to keep them alive, for the time being and at a cost.
Bankers who spoke to WA Business News, both on and off the record, were unanimous that the market for funding had changed radically, most obviously as a result of the financial crisis but also due to new regulations that preceded it, like the Basel II standards regarding how much capital banks need to put aside to guard against the types of financial and operational risks they face.
Those regulations and collapses such as ABC Learning have also taught banks to be more cautious about how much they have exposed to one player in any particular market sector.
This means it is not just small players that have trouble getting funding. Even bigger players with solid balance sheets are finding there is a need to find alternative banking facilities due to the exposure to risk for both their banker and themselves.
Master Builders Association WA director of housing and economics, Gavan Forster, warns that things are going to get much tighter in property development, notably in commercial sectors such as the office market.
“Traditionally the industry is boom and bust and what we are seeing with cranes on the skyline, that will be the end of it for a few years,” Mr Forster said.
New high-rise office developments have largely disappeared, with BGC’s proposal for a building of up to 12 storeys in Osborne Park a rare new project in a market that will have to digest a significant amount of new space.
That sector also has the face consolidation of some key tenants such as BankWest, which was taken over by Commonwealth Bank, and the proposed iron ore joint venture between Rio Tinto and BHP Billiton.
Market observers suggest that clients will now be able to twist developers’ arms over the terms for anchor tenancy, a key metric in gaining funding approval.
Westpac state manager Jay Watson believes confidence is returning to the commercial property market as positive news around the resources sector is digested.
This will bode well for those seeking to work out their projects and escape at least with their shirt.
But Mr Watson admits that, with banks’ own funding sources now much more expensive, they are much more selective about where their money goes and on what terms.
In industrial and residential land development, apart from funding issues affecting the whole market, there are also ongoing issues regarding development approval at all levels of government. This was seen as a big factor in the SAS Global collapse.
While the Barnett state government has acted positively, issues like environmental approvals and policies linked to climate change are causing uncertainty in the marketplace.
That is on top of a situation where, two years ago, bankers were prepared to lend as much as 70-80 per cent of the project value. The finance component has reduced to 45-55 per cent, with much tougher covenants, shorter terms and requirement that land be further down the approvals path than previously was the case. And this is only for developers that meet tough tests regarding their own financial position and track record.
Bankers also said location was important. It appears Mandurah is considered ‘suburbia non grata’ by most financiers.
There is also much talk about levels of competition with three players in the sector – St George, BankWest and Suncorp – having found new owners among the big four or, in the latter’s case, deciding to quit the market altogether. There is much debate about who is really open for business with many claims and counter claims, but what is certain is banks won’t compete for business in most cases.
“Competition in the market has definitely changed, we used to murder each other in the street – that has disappeared,” said one leading banker.
Bankers, in the main, however were adamant their doors were now open to new business, for the right customers.
St George, now owned by Westpac, said the group’s loan book was stabilising.
“St George continues to support and work closely with our commercial property customers,” the bank said in response to inquiries from WA Business News.
“We are open for business and have a dedicated specialist property unit in WA committed to working with good quality, long-term counterparties in the commercial property sector.”
Despite the takeover by Commonwealth Bank, BankWest managing director Jon Sutton said his operation remained in the local property development market, which was being driven by big resources projects like Gorgon and strong demand for housing due to population growth.
BankWest has also experienced trouble but much of that appears to be in the east coast markets where it expanded aggressively under former owner, HBOS.
“We’ll always look to fund quality developments,” Mr Sutton said.