Capital requirements to create shift in construction finance sector

HoldenCAPITAL says additional capital requirements placed on the major banks has marked the beginning of a “new world order” for Australia’s construction finance sector.

The specialist construction finance group said the majors’ new requirements have resulted in a shift in “status quo” throughout the industry.

“Additional capital requirements recently imposed on the big four banks in order to ensure their compliance with the ongoing global banking standards is having a significant effect on the construction finance sector,” HoldenCAPITAL director Daniel Holden said.

“We believe it’s the beginning of a permanent change in not only how funding will be obtained but also who provides it.”

Mr Holden said the overriding regulatory requirements on the major banks represent an ongoing constraint that will impact the pricing and structure of all future loan transactions.

“With the banks now limiting their exposure to the construction sector and pricing risk far more keenly than in the past, a wide range of alternative providers of debt and equity is entering the market or broadening their existing reach,” he said.

“The challenge for today’s developer is to identify which ones best fit both their business and specific project needs.

“This in turn requires a readjustment of expectations as to what constitutes an appropriate finance cost when assessing project viability as the cost of these funds is generally between 2-3 per cent higher.”

Mr Holden said the sector is already beginning to see the return of second-tier banks, investment funds, managed trusts and private lenders “all vying for a share of what will continue to be a growingly sophisticated market”.

“Just as the housing mortgage market was completely restructured with the coming of the wholesale funds and brokerage structures, so we expect to see the construction finance industry undergo a similar metamorphosis, ultimately with similar positive results for the end user,” he said.

[Related: Falling bank share prices 'significant', says RBA]

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Emma Ryan

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