Rise in Non-Bank Property Financing

The lowering of interest rates and the search for yield has seen more funds flow into investment houses and other non-bank lenders financing projects in the property sector. Access to credit for property developers has also become increasingly difficult with banks tightening their lending criteria post the banking royal commission. Together, these factors have contributed to a recent increase in both the volume and size of transactions undertaken by non-bank lenders. In particular, we have seen prevalence of the following types of transactions:

1. residual stock loans - loans to developers of completed apartment complexes as they sell leftover apartment stock. When market conditions are more favourable, leftover stock is sold quickly in a matter of months. As market conditions tighten, that stock can take much longer to shift. Developers seek a residual stock loan as an early release of capital that is otherwise trapped in the completed development. To date, the most active markets we have seen are WA and Queensland, however the cooling of prices in NSW and Victoria may see more activity in those markets if ‘on completion’ sales rates continue to slow down;
2. first mortgage loans - often sought from non-bank lenders to settle on the project land, finance pre-works or the construction of the built-form development. Traditionally the territory of the banks (and will continue to be), however we have seen more of these loans from non-bank lenders likely due to the comparative flexibility of obtaining finance approval, in particular around pre-sales. It allows a developer to continue progressing its development until a bank’s typically more onerous lending criteria can be satisfied and the non-bank lender refinanced out;
3. secured mezzanine loans - sought after by developers seeking to preserve equity or reluctant to bring in a JV partner. The cost of these funds is higher reflecting the lender’s subordinated position, however we have seen developers willing to absorb that additional cost to enable a project to obtain development approval, be brought to market sooner or to assist in funding pre sales commissions, marketing and advertising costs (each of which have increased in a more challenging sales market); and
4. preferred equity investments - deployed in a similar way to a mezzanine loan but structured as an equity investment in the project-owning entity as opposed to a loan secured against the land. Although used for a variety of reasons, the most prevalent we have seen is the developer’s desire to reduce the amount it needs to borrow from a senior bank, particularly where pre-sales have failed to reach anticipated levels. The preferred equity plugs that ‘debt cover’ gap and allows the developer to maintain its equity for the project in question, or other projects on its books.

Wright Legal has extensive experience documenting the above structures. Since 2015, our team has completed over 90 property finance transactions for borrowers and lenders with an aggregate value in excess of $550m in NSW, Victoria, WA, Queensland and SA. Non-bank lenders who benefit from our advice in this sector include boutique fund managers, dedicated property development funders, multi-family investment houses and private lender syndicates.

Please do not hesitate to contact Wright Legal to discuss your banking and financing needs.

Wright Legal has successfully completed hundreds of property finance transactions for our clients. For a snapshot of our diverse property and development transactions see our Property and Development Transactions. Also see an overview of our Mining and Resources Transactions.