Development finance in 2017
Ten points about the direction of lending by GPS in 2017.
- The potential for an oversupply of apartments in the inner Brisbane renewal area (West End through South Brisbane, the CBD, Fortitude Valley and out to Teneriffe) is real. Something like 70% of apartment supply is confined to this area. GPS will not be lending on development projects in this area in 2017.
- Low-rise home units (up to three levels) and townhouse developments with a sub-$5 million loan size, in and around Brisbane, will be the focus for GPS. We can still fund these projects with a sub 10% interest rate. Demand for funding will determine application, loan monitoring and line fees.
- Funding for mid-rise units (four to eight levels) and townhouse developments with loan sizes greater than $5 million, in and around Brisbane, will get even tighter in 2017. Pre-construction presales at a viable cost are almost extinct. It will need to be a very special project to achieve bank presale requirements without handing over all the project profit to the marketers. There are very few long-established private lenders who can reliably fund such projects with limited presales. We all have limited appetites. As we can pick and choose which of these projects we can fund, the interest rate will start at 11.95% with a 1.5% application fee and a 1% line fee.
- GPS will not be funding high-rise unit developments (over eight levels) in 2017.
- Funding land subdivisions is also off the table for GPS. Our investor base wants assets that can produce income should the economy get ugly.
- A post-Commonwealth games moratorium on lending for development projects on the Gold Coast is drawing closer. Any project to be funded by GPS on the Gold Coast must be able to be completed and sold by the opening ceremony.
- Contractor risk is a growing concern for all lenders. The right builder will push funding applications up the priority list and through credit.
- GPS has always, and continues to, like owner builders. Experienced owner builders move to the top of the priority list for lending.
- In late 2016 I have seen an increase in the number of discussions I have had with builders who are becoming frustrated by project start dates being put back due to financing issues. The trend of contractors focusing on projects which are being funded by proven performers such as GPS will increase in 2017.
- When funding gets tight the “opportunists” will emerge. Funding with a proven lender will be more important than ever in 2017.
Overall, 2017 will be a challenging year. Developing and maintaining strong relationships with lenders will be very important. If a lender does not perform, it will be a long and hard process to find an alternative funder, with heavy cost penalties.
If you have any queries, or would like to discuss your 2017 funding requirements, then please give me a call.