The Times Are a-Changin’

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The APRA driven homogenisation of bank credit, which requires 100% plus debt coverage as a risk mitigant, has caused an influx of applications for construction finance to lenders such as GPS. Slowing sales rates and tighter bank lending criteria has caused there to be a similar influx for residual stock facilities.

These market condition changes have caused several large shifts in the industry, including:

Certainty of funds has now replaced cost at the top of the priority list for borrowers.

There is presently only a limited number of long established lenders who have a proven track record for lending in excess of $3 million.

Borrowers are now more likely to directly approach lenders.

The loan pipeline at GPS is now running at around two-thirds direct from borrowers and one-third referrals from brokers. I expect that there is a variety of reasons behind this change. A common thread, however, is the confusion created by some brokers also being (and in some instances claiming to be) lenders.

Many years ago, when I was still a solicitor/private lender, my father took me aside and made it clear that I had to decide whether I was a lawyer or a money lender. If I tried to do both, I would “muck” it all up. It was some of the best advice I have ever received. Advice that helped steer GPS through the solicitor/private lending issues in the late 1990’s, and GFC, when there were so many failures.

It is now a lenders market.

The abundance of applications has allowed GPS to focus on shovel ready deals for borrowers who want to get on with their project. This has caused many applications for finance to fall off the list due to borrower procrastination.

Operators like GPS, who are governed by the Managed Investments Act, have a fundamental obligation to act in the best interest of our investors (section 601FC). We have seen a couple of loans that have to go back into the pile after delays caused the valuation to go stale. In one case the re-valuation came in approximately 7% lighter, which caused the borrower to put in extra capital into the project to maintain the required LVR. In other cases, the loans have to then compete with other loans coming up in the pipeline. There is a big difference in quality between applications from late 2016 and the beginning of 2017, when it was still a borrowers market. A deal may be a deal but section 601FC, will always prevail.

When funding gets tight some sharks will inevitably come out.

It is always disappointing to hear stories of borrowers who have paid large upfront fees for loans which did not eventuate. GPS only charges a small acceptance fee to cover our time and effort. The residue of the acceptance fee is to cover valuation, quantity surveying and legal fees. We get paid our application fee only when we settle the transaction.

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