The start of 2016 has been one of the more interesting periods in my 20 plus years as a private lender.
The year started with a flood of loan applications. They generally commenced with “I have been dealing with (insert name of bank) and they keep mucking me about and changing the rules”.
Aware that GPS monies are hard earned by our loyal investors I did not get a rush of blood to the head, but rather sat back and analysed the market and our product. This has been a major contributor to there not being many new investment opportunities so far in 2016.
Initially I looked at a potential oversupply of product in the Brisbane market. In past articles I have discussed why I have believed this is only applicable to a very specific type and geography of apartments, which is not, and has never been, the GPS market.
I then went through the loan applications to determine which of the projects were the strongest.
The GPS product has traditionally been good quality, entry level units and townhouses in acceptable suburbs which are well serviced by transport, shops and other amenities.
The relevant local authorities, and in particular Brisbane City Council, appear to also have identified such areas and have increased density levels around transport nodes to cater for the ever growing population of Brisbane.
The choice was to either increase average loan sizes from 10 packs to 20 packs to stay in GPS traditionally serviced areas, or stick with the traditional loan sizes, and lend in less serviced areas.
The decision to move towards the 20 pack developments was made easier by looking at the quality of the borrowers. While not as viable for GPS I will still go for two 10 packs, in good quality areas, over a 20 pack so as to diversify risk.
Larger loans in a time when oversupply of product may be an issue has necessitated GPS taking a more conservative approach in our lending practices. Sales are now more important than ever. The GPS loan conditions now set benchmarks for our borrowers to achieve full debt coverage by completion of construction.
If we have concerns about sales levels, then the policy will be to claim a higher interest rate and use this to subordinate part of the loan to a wholesale investor. This will effectively reduce the LVR to GPS investors.
GPS has gone down this path as we believe our investors would want more security rather than a higher return should we have any concerns, mid-term, about a project.
Overall, we continue to look for projects to fund which have end product at around the median price, and which have sound prospects for rental. This has been our well proven model for many years. The only thing we are really seeing is an increase in densities now permitted under the town plans.
In larger loans, GPS generally co-funds with other southern based funds to reduce funding risk and offer more diversity for GPS investors. These southern based funds like the South East Queensland market due to the concerns about the Sydney and Melbourne markets.
They also like dealing with GPS as we have an extensive knowledge of our market, a very hands on approach in management of funded projects, and we stick to our knitting. Being one of the last private lenders still operating in Queensland also assists.
GPS works very hard at all levels to get it right. We have an impressive record and wish to keep it intact.
Thank you for your patience and ongoing support, it is truly appreciated in our referrals based business.