A new offshore funding source has enabled one non-bank lender to offer developers a lifeline as banks shy away from the sector and apartments fail to sell.
Chifley Securities this week announced that it is offering construction and commercial property loans from 7.95 per cent. The group has released a first tranche facility worth $50 million to be placed by 30 June 2017 for property loans in value of up to $7.5 million.
The Sydney-based lender has been actively targeting commercial and residential developers over the last 12 months as banks turn away from the construction sector, fearing an oversupply of apartments in Melbourne and Brisbane.
“We have tapped a new source of offshore funding and can supply developers with a low rate alternative to the major lenders, which are pulling the rug from under their property clients,” Chifley Securities’ principal Joe Morello said.
“Many developers we are funding are backed by strong equity and balance sheets, but are still finding trouble with the banks when it comes to construction and other property loans,” he said.
Chifley Securities, which posted $1.1 billion in loan applications for the 2016 calendar year, is now seeing significant demand from developers who have been left with “unsold apartments” and require financing to retain ownership of the property.
Mr Morello said that Chifley has seen financing for this activity, where either developers choose or are forced to retain unsold apartments, rise 25 per cent his year.
With the majors pulling out of the market, he explained that developers are now being left in a difficult financial position.
“The developers do not fit the banks’ new lending criteria, which has recently been tightened by APRA,” Mr Morello said.
“We have financed a range of developers with unsold stock across the Eastern Seaboard over the last four months as they simply have been shut off from the Tier 1 lenders.
“The stock comprises hundreds of apartments, as well as commercial and retail areas of the developments that are often held by the developers and leased.”
While “Tier 2 and Tier 3” lenders have stepped in to finance this residual stock, Mr Morello expects developers will continue to face challenges as more developments move to completion over the next two years amid the tightened lending conditions.
Chifley Securities is targeting lending in the 2017 calendar year of $1.5 billion for commercial and residential property projects in cities and regional centres across the Eastern Seaboard, with the majority being undertaken in western Sydney.
Apartment construction is currently two times higher than the historical average. While some economists have warned that an oversupply in certain pockets will lead to a reduction in prices, NAB recently commented that the oversupply rhetoric is “overly alarmist”.
“Much has been made of emerging risks in the apartment market,” NAB said. “The apartment construction pipeline is at least two times higher than historical norms (relative to population growth) in most states, and prices in some CBD apartment markets (including Melbourne) are already falling.
“That said, much commentary in the public domain is overly alarmist. Lower construction approvals, diminished spare construction capacity and tougher credit conditions are likely to slow the rate of completions.
NAB highlighted that the industry’s previous demonstration of the ability to self-regulate supply is likely to elongate the construction cycle and reduce the risk of a destabilising market correction (although some pockets of the market may still experience excess supply).
According to the report’s analysis of the construction cycle, it may reach its peak as soon as 2018.
[Related: Oversupply commentary 'overly alarmist': NAB]