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Builders and Developers - Will Commercial Property Finance Get Easier?

  • Category: Business Articles, Commercial Property Loans

builders-and-developers-get-commercial-property-finance

Developers in Western Australia have been struggling to get commercial property finance to fund new apartment developments in recent years. Banks are wanting presales in the range of 100 – 120% of debt, or an income stream sufficient to support their loan requirement.

However, presales in the current climate in Western Australia are very difficult to achieve without giving away too much of the developers profit. And buyers are wary about committing to a presale due to concerns they may not be able to get a mortgage when the time comes to settle.

Major banks also have a national credit policy rather than a regional policy. Western Australia is a very small part of the overall market in Australia but from a bank’s perspective, whatever is happening in other parts of the country is happening Australia wide. So if banking regulations are being tightened up in Sydney and Melbourne, this will also affect Western Australian bank lending policies when it comes to commercial property finance.

China’s crackdown on overseas investment also hasn’t helped matters. A large part of the property investor market has dried up due to the resultant inability to get money out of China, with commercial real estate dropping 22% in 2017.

It’s not all doom and gloom for builders and developers

Due to lack of land subdivision and unit / apartment construction, there may be a shortage of this stock in 12 – 18 months’ time in the Perth market. This is good news for a developer that can get a project off the ground now.

Many developers have also started offering generous pre-sale incentives to get projects underway. According to this ABC article, one developer “is offering up to 1 million frequent flyer points - the equivalent to three business-class return trips to Paris”.

Others are throwing in luxury cars or offering to pay mortgage interest for a year in an effort to attract buyers. Incentives worth up to 6 percent of the purchase price can make the idea of buying off-the-plan attractive for prospective buyers.

Second and 3rd tier lenders are getting more involved

Second and 3rd tier lenders are now looking to fund transactions on terms which major banks were looking at three to four years ago. For example, they’ll provide 50% presale cover but at premium interest rates (circa 12 – 15%). Some lenders are also prepared to lend without presales but are very selective on suburb and development type.

Three key requirements by lenders (regardless of the tier level) is:

1. A minimum margin on development cost of between 15 and 20%,

2. Maximum loan to total development cost ratio of 70 – 75% and

3. A maximum loan to end value ratio of 60 – 65%.

Final thoughts

As a shortage of unit / apartment construction becomes evident, there may be a relaxing of lending parameters from the major banks. In this changing environment, it’s good to have contacts that have their finger on the pulse of the market so you can make an informed decision. Speak with your commercial property finance broker to see if opportunities have changed for your project.

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