Changes to the bank lending rules have created opportunities for investors in the areas of non-bank lending and private funding. Holden Capital Partners Head of Investments Gary Connolly discusses these opportunities and how SMSF trustees can participate.
Listen to the full interview below…
DARIN: A tightening in the rules governing credit availability from traditional banking institutions has opened up opportunities for non Bank lending and from private funding organisations, especially in asset classes such as property.
I have here with me today Gary Connolly from Holden Capital to discuss this issue. Hi Gary. Thank you very much for joining me this afternoon.
GARY: Thanks very much for having me.
DARIN: So why has Bank lending become more difficult in that property space?
GARY: I guess it's predominantly been driven by regulatory changes, which have been imposed on the banks for a couple reasons, I guess, first and foremost, to make sure that they're not overexposed property in the event of an economic downturn and also the risk that the government has to bail out the banks should that occur, under the guarantees. The fact that Holden Capital has gone from having 64 percent of its deals settled via funding by the four major banks in 2015, to twenty percent in 2018, is a really practical example of how much the lending landscape has changed over a relatively short period of time.
DARIN: So if we focus on property developers in particular, where are they getting their construction funding from right now?
GARY: Well, there's been a range of new non-bank funding options come to the market and really as a result of the hole left by the banks and the need for that to be filled and these can range from institutional lenders who typically focus on larger developments through to family offices, private lenders and a range of new and existing mortgage trusts, and the latter tend to focus on small to medium sized projects.
DARIN: When I introduced you I said that you were from Holden Capital. Could you please fill us in on what Holden Capital does and what role Holden Capital plays in this space?
GARY: Absolutely. Holden Capital Partners is our own fund where we allow sophisticated investors to participate in select loan investments. Holden Capital Partners has the ability to get involved at all stages of the project life cycle, that can be from the start where we fund the site acquisition, through to being able to facilitate most components of the capital stack during, construction funding right through to a borrower requiring a residual stock loan at the end. Holden Capital Partners traditionally works with privately owned and operated entrepreneurial started developers. They typically have a couple of projects on the go at once at various stages of completion across their portfolio, and then we allow investors to participate in each select loan investment and each investment is presented to them via an information memorandum that sets out the rate of return available, the loan term, the location, information about the sponsor and the project. Generally all the information that you need to make an informed decision whether to take place in that select loan investment, or not.
DARIN: So we're talking about an SMSF audience. How can SMSF investors get involved with what Holden's doing?
GARY: Sure. The first step is to go on our website, which is www.holdencapitalpartners.com.au. Once they register will send a document to be completed to finalise their registration. So I mentioned previously that select loan Investments available from Holden Capital Partners can only be invested in by sophisticated investors. So the trustee basically has his accountant certify that they pass one of the tests as prescribed by the Corporations Act.
DARIN: Okay great. So returns are a big thing. So what returns can SMSF investors expect to get out of the Holden Capital Partners activities? What sort of level of risk are we talking about?
GARY: Holden Capital Partners present three different types of investment opportunities to our investors ans each of them has a varying risk/return profile.
The first type is first mortgages. Typically, they are for a site acquisition loan or a residual stock loan with loan to value ratios upwards of 65 percent. For those deals, we normally provide net returns to investors of between nine and eleven percent per annum over six to 12-month terms.
The second category then are second mortgages. In those instances were providing up to 75 percent loan to value ratio and investors generally earn 16 to 22 percent per annum net of fees over 12 to 18 month terms.
The final category we provide are preferred equity, I guess there are two sub-categories to that. The first are where the loans very much have the characteristics of second mortgages i.e. the loan-to-value ratio is up to 75%, however, the first mortgagee hasn't allowed us to register a mortgage behind them. Hence, it's presented as a preferred equity opportunity. The second sub-category we are providing actual equity in the capital stack where we can be going up to about 95 percent on loan to cost and 80 to 85 percent loan to value ratio. The returns for investors on those transactions are typically 24 to 30 percent per annum net of fees, over seven to eighteen months terms.
I guess the beauty then across all our investment opportunities is we don't operate as a pooled fund, so we don't make decisions on behalf for investors. So each select loan investment that's presented to our investors is standalone and the investors decide which projects they want to invest in themselves based on their own risk appetite.
DARIN: And people always ask when it comes to property, you know, sort of market segments and capital cities and wherever the the opportunities are. So right now which market segments are presenting the best opportunities as far as this sort of activity goes?
GARY: Good question, I think probably over the last six months, we're seeing a lot of requirements for site acquisition loans as well as general capital partner opportunities. And they're coming across all states, you relatively speaking, there's no key stake the stands out. I guess the benefit then for Holden Capital Partners investors is that we have multiple deals presented to us every week by our BDMs who are working on the HoldenCAPITAL team in our Melbourne office, our Sydney office and our Brisbane office, which means that there's always a good amount of deals to choose from
DARIN: Okay, Holden Capital Partners will be one of the presenters on the SMS trustee news SMSF Trustee Empowerment Day, which is to take place across three capital cities in September starting on the 17th of September in Brisbane and finishing up on the 25th of September in Sydney. If you would like to find out a little bit more about the event or actually register to attend the event, please go to the SMS trustee News website, which is on screen now and follow the prompts to have a look at that event.
Thank you very much for your time today Gary and I look forward to seeing you on the road show.
GARY: Thanks very much for having me Darin.