October was a very busy month for the GPS team with the opening of the GPS Invest Pooled Fund (‘Pooled Fund’) and offerings of new GPS Invest Select Fund (‘Select Fund’) loans for investment.
We need to remind our investor base that there has not been any fundamental change to the strategic plan of GPS.
GPS has been closed for new investment during COVID-19. Our focus has been to look after what we have got.
The early stages of COVID-19 saw a slow down of new project starts which had ramifications for our funding cashflow.
As we are now comfortable with the residential property market and our loan pipeline, we are returning to our pre-Covid level of funds under management.
Due to escalations in building prices and sale prices of completed product, there will be an increase in average loan sizes. This will require GPS to raise further funds. At this stage we look to continue accepting funds into the Pooled Fund until the Christmas break. We also are working towards making another lot of Select Fund loans available for new investment.
This is a great opportunity to place your funds with GPS and have them earning you interest over the Christmas period.
There has been an increase of enquiry from traditional bank borrowers as the GPS model for funding projects is always very attractive when build and sale prices are increasing.
The issue for developers is that to achieve bank funding they must have preconstruction commencement sales. These sales are at “todays” prices and require payment of half of sales commissions at the beginning of the project. This reduces the ability to achieve uplift in sales prices from the rising residential property market.
On the other side, building prices continue to escalate. We have already seen and read about price increases and delays in the supply of building materials.
Another issue which I believe we will see more of in 2022 is the availability of trades people to perform the building works.
The residential development industry has a shortage of local trades people. Historically, there has been a reliance upon overseas trades people who come to Southeast Queensland on visas. This has stopped due to border closures.
As we see the resumption of more residential building works, there may well be a manifestation of this issue unless Queensland fully reopens its borders.
The GPS model of funding a residential development project allows developers to use the rising property market to offset escalating building costs. Not having to pay large amounts for commissions at the beginning of the project represents a considerable saving in interest costs. It may also reduce the overall cost of commissions, as preconstruction commencement sales are generally more expensive than sales achieved once construction has commenced.
A significant issue for GPS is the volume of very cheap institutional monies which is presently available. This is driving borrower rates down.
GPS does not want to get involved in a race to the bottom as this only benefits the large institutions. The reality is that as soon as there are better returns elsewhere those monies will evaporate from the residential development market.
GPS has demonstrated over the past 25-plus years that there is a need for lenders like us. This is because there is little loyalty shown by large financial institutions.
Many residential developers and builders in Southeast Queensland have become very wary as to whether the “blow ins” from southern states will be around to provide the long term support they require.
At this stage, I believe that there will be more pressure for a reduction of interest rates in 2022. I see it as more of a minor adjustment.
On the upward pressure side for interest rates, there is currently some interesting reading as to the direction of the bond market. Predicting the bond market is well outside my expertise.
Richard Woodhead | Managing Director
