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Non-banks to take over in construction lending: Survey

While supply chain issues and insolvency risks have eaten away at banks’ appetites for construction lending, non-bank lenders are expected to fill the gap.

Commercial property finance broker Stamford Capital has completed a survey of 100 lenders, including banks, non-bank lenders, private lenders and offshore institutions, testing the temperature around real estate debt capital markets.

The group has reported a more conservative outlook for the year ahead, as interest rates start to rebound on an upwards trajectory.

Lenders were found to remain optimistic about their loan book growth, with the vast majority (90 per cent) expecting to increase their portfolios in 2022. In contrast, only 82 per cent had expected loan book growth the year before.

More than half of the respondents had loan books totalling more than $500 million, while 14 per cent had less than $100 million.

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While more than half (55 per cent) of banks expect to increase investment loans in 2022, when it comes to construction loans, the majority have said they either maintain (39 per cent) or decrease (29 per cent) their books.

Supply was noted as a major driver in the report, with supply chain disruptions and a growing list of building and construction firms going under.

Non-banks have looked to plug the gap left by larger lenders, with almost two-thirds (62 per cent) expecting greater investment in construction lending.

Two-thirds (67 per cent) of lenders reported they expect non-banks to increase their investment lending.

As Stamford Capital joint managing director Michael Hynes explained, “appetite continues to exist”.

“The challenge for non-banks is to find significantly or sufficiently low-cost capital to be competitive in this market,” Mr Hynes noted in the report.

“And we are seeing big institutions take a real interest in the non-banks and reduce their cost to capital.”

The report noted that non-banks have become more competitive in recent years, while they are less risk-averse than larger lenders in certain sectors, particularly around construction lending, where “borrowing opportunities with major banks have started to dry up”.

However, as non-banks race to grab market share, they are expected to come into APRA’s sights.

“Whereas less than half (48 per cent) of respondents last year believed APRA would increase its regulatory oversight of the non-bank sector, 54 per cent now have strong expectations that this will occur in the near future,” the report said.

More than a third of lenders (36 per cent) said they expect foreign banks will start increasing their investment activity, particularly as borders reopen.

However, other competitors in the market have fallen behind – while about half (54 per cent) of lenders in 2021 said crowdfunding would struggle to emerge as a serious lending option, that proportion has now risen to almost two in three (62 per cent).

Margins are also expected to rise, with almost half (47 per cent) of respondents saying there will be an increase in loan margins, compared to only 17 per cent who agreed in 2021.

Expect new products to emerge

The vast majority of lenders anticipate rising interest rates, with more than half (54 per cent) expecting a bump size of around 0.5 per cent to 1 per cent over the year.

However, economists have speculated the cash rate will rise by as much as 2 per cent over 2022.

Off the back of the rise in rates, 36 per cent of lenders indicated they plan to develop new products over this year, to entice borrowers and meet new lending appetites.

The lenders planning new products had their eye on build-to-rent, construction lending and stretched senior debt for investment and construction lending.

Presales returning to pre-COVID norms

Around 22 per cent of lenders reported that they are willing to finance zero presale projects – a decline from 2021.

More than half (57 per cent) of lenders now expect to see at least 60 per cent in presales, up from 45 per cent in 2021. Lenders expect developers to generate enough presales to satisfy their risk appetite, with the challenges of last year such as lockdowns reducing inspections through sale suites now abated.

Around two-fifths (42 per cent) of lenders tipped that the residential development sector has hit peak growth, while 51 per cent believe residential apartments have either peaked or are in an early growth stage.

The report noted residential developments will continue to suffer from supply chain issues, labour shortages and surges in cost of materials.

Meanwhile, 65 per cent of lenders have tipped that the industrial sector is at its peak, while around half have said the commercial and retail sectors are in recovery.

[Related: Non-majors lift mortgage and savings rates]

Non-banks to take over in construction lending: Survey
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