Additionally, please paste this code immediately after the opening tag:

2018 Development funding: The landscape continues to evolve

Principal at HoldenCAPITAL Partners, Dan Holden, shares his views on the opportunities emerging in the construction finance sector as well as an insight as to where they are seeing their clients active.

Another long summer continued to dominate the Australian east coast and there is no doubt that the changing face of construction debt providers is something that more and more developers are coming to grips with as they roll their sleeves up and look to secure funding for their new projects.

Sales conduits and rising presale hurdles, the next game changer?

We have expounded on the impact of the regulatory changes and how they have redefined the construction finance landscape and don’t propose to revisit it, however it is not the only force that is changing the way the market operates. Changing presales hurdles have also had a big impact, which got us thinking about the sales process generally. Not that long ago, developers were reliant on traditional real estate agencies to secure sales and qualify for finance. This was a slow, hit and miss process dependant on the smarts of the operatives available in the location.

More importantly, it was outside of the developer’s direct control however; lenders were more flexible on presale requirements with consideration given to location, product and client experience, which gave flexibility. This changed, particularly in Queensland, as demand soared and then crashed on the back of record breaking net interstate migration from the southern states.

As always, developers innovated. The most effective strategy was to “on board” by hiring sales and marketing experts, two very different skills. This provided control of the process removing the risk of agents being tempted by cheaper or easier to sell alternatives. It also linked remuneration to results attracting operators prepared to back themselves.

The downside was that it was an expensive exercise for all but the larger operators with a pipeline of projects to occupy these teams and spread the costs while smaller developers were forced to make do with the agency option.

Leading up to the Global Financial Crisis (GFC) we saw the rise of the specialised sales operations starting with the “Project Sales” teams created within major agencies in an attempt to gain contro of the lucrative project sector with varying success. These teams relied on the quality of staff which was in turn impacted by remuneration considerations, quality of the product and the financial clout of the client. This option continued to discriminate against smaller developers.

Before and after the GFC, we saw the specialised project-marketing operators become dominant by assisting developers large and small based on a price per sale. This was achieved by sourcing buyers utilising a number of methods based on volume marketing strategies. Initially the focus was on pure investment sales utilising lists of qualified “investors” sourced from accountants and investment advisors. At times the market couldn’t get enough product to satisfy a rampant investment market, which far outstripped owner-occupier demand.

Post the GFC, while these sales groups dominated most states, slowing local investor demand was offset by rising offshore investor interest, particularly from Asia. This ensured these methods continued to be the norm albeit eventually slowing after a period of frenzied activity followed by the inevitable political and regulatory counters. As a consequence, many larger businesses were forced to close or dramatically cut back operations, which are now a far cry from their peak. So, once again, developers are seeking the best means of securing presales. With the Banks now regulated to the hilt, their risk models require 100 per cent debt cover in most cases with little or no flexibility given to developer experience or business acumen.

Non-bank lenders are offering less demanding terms by assessing on the merits of the project and enabling developers to start projects more immediately and take advantage of prevailing market conditions which is the point of the exercise albeit at a price differential which is a topic for another day. However, as the non-bank sector matures and their loan books swell, we are seeing a trend towards increased presale requirements, once again slowing development starts. It's still too early to call if this will gain momentum and become a norm but it serves as a salutary warning to developers who fail to understand the importance of sales, pre, during and post construction. Profits are intrinsically linked to your sales success and the developer that fails to take notice of the prevailing winds and how to weather them is taking greater risks than they know.