Mitchell Brandtman compared a basket of their South East QLD projects which had successfully obtained construction funding over two periods – the first four months of last financial year (Jul-Oct 2015), and the same period in the current Financial year (Jul-Oct 2016). The goal was to see what has changed and what projects are currently getting funded.
There are a number of mixed messages out in the market place at the moment, and depending on where you sit you could be the busiest you have ever been, or staring at the edge of a rapidly approaching cliff.
The reality is that professional developers make up the core of most construction lending and they are a resilient lot.
They develop for a living and are adept at picking the cycles and moving from one sector to another depending on where they are in the property cycle.
On the other side of the fence, financial institutions don’t make money from leaving their funds in cash – they need to lend. APRA provides a helping hand with guidelines, but if you have the right product at the right time, and with the right team, then there will be funds available.
So What Has Changed In The Last 12 Months?
Based on the press, you would expect to find that number of construction loans for ‘residential’ purposes had slumped compared to the same period last year, however the opposite is true. The quantity of projects funded for ‘residential’ purposes are up over 15%. However, ‘residential’ picks up a wide variety of project types, the real story is in the detail.
Above: The figures in these graphs are based on a sample selection of projects Mitchell Brandtman worked on that obtained construction finance during the periods specified. The classification system is internal.
There is a rapid shift away from larger multi-residential projects, towards smaller boutique projects in the 5-10 kilometre ring.
In this sample of projects from South East QLD, the larger projects ‘8 levels and above’ and ‘4-8 levels’ receiving funding have halved, and the number of ‘townhouse’ and projects ‘up to 3 levels’ have increased nearly 60%.
Above: The figures in these graphs are based on a sample selection of projects Mitchell Brandtman worked on that obtained construction finance during the periods specified. The classification system is internal.
Developers are also casting their nets outside of the Big-4 for construction funding with a steady growth in projects funded by the smaller banks and alternative funders. They are also becoming more aware of the risk appetite of particular institutions for different types of developments and are targeting their finance applications.
Funders who last year were leading the pack in the multi-unit sphere are now more interested in funding sub-divisions.
When we look at what is actually under construction at the moment, we can see that the change in residential type has already started to bite. The data below is based on a 5 km petri dish of projects in Brisbane and on the Gold Coast ‘strip’.
It is based on all projects currently under construction with greater than 40 units.
The black line represents Nov16 and shows us that even if we add all of projects that are currently being marketed (green) to the projects that are currently under construction (red), then we are looking at having less work tomorrow than we do today in the 40 unit and above space.
There are a number of trends to watch out for in coming months:
- Financiers becoming increasingly wary of funding projects with ‘unknown’ contractors, or those who are not performing well on current projects. There are an increasing number of contractors who are struggling and the banks are following them extremely closely. The right contractor may win or lose your preferred a funding deal
- As preferred contractors in good standing with the banks become harder to find, Developers are resorting to locking them in earlier by using Design and Construction Contracts
- Experienced Owner Builders are revelling in the current market. They are agile enough to move quickly, and with one less layer of margin are able to make projects stack up
- A greater focus on lending for ‘non-residential’ purposes – in particular for aged care, pubs and clubs, and subdivisions
- A larger number of smaller projects with a shorter average loan life cycle – changing the dynamics of how financiers maintain their loan portfolios