Projects being killed off due to funding shortfalls
It’s a tough market out there for property developers, with input costs remaining prohibitively high and labour shortages adding more obstacles to breaking soil.
And while most brokers are telling MPA that credit appetite among the lenders is healthy, they are warning that lowball valuations from the major valuation firms are stopping projects dead in the water.
Stuart Wilson (pictured above), director of Adelaide-based Commercial Finance Brokers, worries that valuation firms – among the larger ones being Knight Frank, CBRE and Opteon – lack sufficient market knowledge outside of the Sydney/Melbourne bubbles.
“Eastern-state lenders only have eastern-state valuers on their panel,” Wilson told MPA. “They’re charging a premium to fly people over and not using local valuers which is probably our biggest bugbear at the moment.”
While these valuation firms are independent, major banks and second-tier lenders will only accept a valuation from an approved, on-panel valuer.
“I've done a couple of recent deals where they've got no idea of what's going on in the Adelaide markets. (They’re) charging eight grand for an evaluation when a local guy is doing it four,” said Wilson.
These eastern states valuers “don't understand” the Adelaide market, he continued. They're potentially looking at historical property prices that don’t take into account the fact that the city’s property market, in Wilson’s words, “is going mental”.
Adelaide is currently sitting at a tight 0.6% vacancy rate, while the city’s median house price recently shot above $1 million for the first time.
Massive property shortages and land banking are helping to drive up prices, according to Wilson.
For the record, Wilson believes inadequate pricing is an issue across the full spectrum of lenders, including the traditional Big Four and the growing cohort of non-bank lenders on the scene.
He cited instances of a client’s project being priced millions of dollars below the presumed project’s value.
That is a massive disparity that can completely kill a project. Assuming a 50% loan-to-value ratio (LVR), that could leave a seven-figure funding gap that the client, with help from their broker, must find.
Often, this will come from the opaque world of private credit.
Going private
“Private credit is real and has taken up a massive amount of market share,” said Martin Kennedy, executive director – head of capital advisory at Sydney-based brokerage Quantaco. “Traditionally there used to be a massive gap between bank pricing and private credit pricing, but particularly in commercial landscape and development deals, it's quite narrow now.”
But tapping private credit, with its lack of transparency and mixed market reputation, opens up a whole new can of worms.
While the legitimacy of private funders is increasing as their share of the market gets larger, there are persistent risks around ‘lend-to-own’ tactics, large upfront fees and distinct lack of regulatory oversight.
Read more: The growing legitimacy and persistent risk of private credit
Of course, it depends on which private lender you work with. Asked if engaging private lenders is inherently risky, “not with the ones I deal with, mate” was Kennedy’s reply.
Private lenders are more inclined to go up the LVR curve, although “you'll pay a coupon a bit higher than normal than for that additional amount of debt,” Kennedy said. “These private shops are all ex-bankers, so they know risk and they can price risk.”
But Kennedy mentioned that some valuers won’t value for a non-bank or a private lender, because they don't want to take on the professional indemnity risk.
“Developers have either got to take a punt and start incurring costs before they buy it to make sure they get a valuation a bank can rely upon, or they’ve got to negotiate a longer settlement period than standard, knowing that the process is going to take longer,” he said.
While brokers like Wilson working outside of the eastern states' hotspots worry about the quality and accuracy of valuers in more regional areas, it is evidently a problem no matter where you are.
Melbourne issues mount
Morgan Owen (pictured below), founder of Victoria-based brokerage Penny Finance, told MPA that developers are finding it harder and harder to get projects off the ground.
“The costs are just out of control, the taxes are out of control and so actually making the deals stack up at a relatively low LVR is really, really hard to do,” said Owen.
Developers are telling Owen that they just can’t justify launching more projects in Victoria. Instead, they’re moving interstate to make the deal make sense.
“It's just too expensive to do the construction,” she said, citing the usual suspects like material and labour costs. Then come the valuers, who also “have a really big impact” on doing business.
“We'll have a client who's done their feaso (feasibility study), has the expectations of sales results, has engaged agents and all these other people in order to work it through and then the valuer will just come in and just typhoon the whole thing,” Owen said.
Owen suggested that, aside from protecting themselves from PI, valuers are considering stagnant land prices when making their assessments.
“They're pretty much always going to air on the side of caution and they're obviously managing their risk in that way,” she said.
The problem is “not at all” more pronounced outside of the eastern capitals, added Owen. Whether it’s sought-after postcodes like Elwood or less-developed regions in WA, “the valuers are absolutely not discriminating;”
When it comes to finding ways to plug a million or so dollars of funding, Owen often must go back to the drawing board and seek out a lender who will accept a higher LVR.
Using private credit is also an option, but she is cautious about tabling a second mortgage in front of her clients – and not just because of the inherent risk in tapping private credit.
“You've just got to be so careful because as soon as you start adding seconds, you're just really eroding any equity and obviously you're squeezing the margin and the profit pretty hard.,” she said.
“You’ve got to account for the fact that the development timeline could push out and you definitely don't want to be holding these second mortgages at say 18% for long periods of time.”
