The nature of loan applications currently coming over my desk indicates that a credit crunch has begun in the residential construction lending market. It is quite pronounced for apartment developments.
GPS is a small scale lender. Like many of our peers we are not looking at expanding to fill the large gap which has resulted from the pull back by the banks. At our last loan pipeline meeting we reviewed 15 good quality applications. As GPS only traditionally settles an average of two loans per month, this demonstrates the current competition for funding. I believe it also shows that there will be a substantial decrease in new project starts as developers scramble to find funding.
While there are still a few lenders with an appetite in the sub $3 million loan area, the number of established lenders in the over $5 million segment has largely dried up. In order to make the grade for a loan of over $5 million, the borrower will need to be experienced and have a strong balance sheet. Repeat borrowers are generally given preference. Interest rates are pushing 13%, when line fees are included, with LVRs sitting around 60%. While pre-sales are not essential, they do assist. It took me some time to get my head around the cost of such funding. The market is speaking and we have to listen.
One of the things I look for with new borrowers is their potential to join the loyal GPS stable of borrowers. GPS is built on repeat and referral investors and borrowers. This loyalty is generated from our service and skill levels. Now is not the time to shop for finance. If you are a professional developer, then you should be building long term relationships with lenders who will go the distance.