Property developers choke on “biggest credit squeeze since GFC”

Law firm Ashurst claims in a new report that residential property developers are having to deal with the “biggest credit squeeze since the global financial crisis”.

Ashurst’s real estate finance partner, Ken Nguyen, notes that loans to finance construction are largely unavailable to developers, while he says non-bank lenders such as Bass Capital and CVS Lane are being “extraordinarily cautious” with investors’ money:

Not only are loans harder to secure from increasingly cautious and risk-averse banks and non-bank lenders, but they have become more expensive and restrictive since the onset of the COVID-19 pandemic.

…average aggregate margins and line of credit fees offered by banks have increased by 50 basis points since the start of the pandemic, rising from around 3 per cent a year to around 3.5 per cent.

Developers have also had to find significantly more equity to get a bank loan, with average loan-to-value ratios (LVRs) tightening from 62.5 per cent to 50 per cent over the same period.

“Non-bank lenders are focusing on completing existing transactions and getting money repaid on time, rather than writing new transactions,” he told The Australian Financial Review.

As a result, Mr Nguyen said developers’ access to finance for residential projects post-COVID-19 was “as tough as it has been since GFC”…

“The risky assets are seeing greater falls in valuations and greater falls in LVRs. Lender and valuers are being more cautious in these sectors than for vanilla residential construction loans,” [Bass Capital partner Yehuda Gottlieb] said.

This is to be expected. The Australian housing market is facing a ginormous supply glut owing to a huge pipeline of apartments still under construction just as immigration (demand) has collapsed:

With travel restricted, short-term rentals like Airbnbs have also been dumped onto the long-term rental market, in turn worsening the supply glut.

Who’d want to lend into that environment?

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. Off topic, but I wonder how all those peer to peer lender sites are going? I remember there used to be a few people on here who were using them a few years back.

    • WhatcouldgowrongMEMBER

      Not as bad as you might think, the one I’m with is doing quite a lot in terms of risk management – higher fees to cover defaults and more stable rates – there was a time there where they had liquidity issues and the rates were great for lenders. The good thing is that essentially being a broker, it’s in their best interest to find good borrowers otherwise everybody loses.

      • The Penske FileMEMBER

        I agree. Some have written some real risk though in the last twelve months and investors will get a haircut.

    • The Penske FileMEMBER

      I’ve written before about some of this lending. Last year the ears were pinned back by some providers and there will be some small losses. These lenders basically take a charge over everything including your shirt and this is where a contagion could hit the banking system.

  2. hey but Dan Andrews admitted that Res Property IS the VIC economy (hence the concessions afforded to construction under stage 4 from the ealier cabinet recommended) which had all shut except essential construction

  3. pfh007.comMEMBER

    Until we have 5% vacancy rates in all our capitals for 10 years there is NO glut.

    To get there we need to build baby build

    AND keep the borders sealed.

    • Arthur Schopenhauer

      Seems to be the drop next door in 3084 & 3079.

      2015 prices. 2012 here we come.

      Wouldn’t want to own a GRZ 1 or 2 site in the middle suburbs. There was a site in Ivanhoe advertised in the mid 900s. Ouch!

  4. Jumping jack flash

    Banks are hurting themselves. They need to lend.
    Government needs to create conditions and adjust debt eligibility so banks will lend greater volumes of debt than ever before to people in worse financial situations than ever before.

    NIRP / UBI looking promising.

    Whats the alternative? More and larger deposit subsidies? Letting people access their super to use to obtain debt with while the super leeches scream? Tax cuts? Tax only work if you have enough income to pay tax out of.