The Current Development Finance Market

Since the GFC there has been significant tightening of credit policy by senior Australian banks and non-bank property lenders. Pre GFC developers were often able to obtain bank funding for up to 100 per cent of cost of a development project subject to the loan having full debt cover by pre-sales and a loan to value ratio of no more than 70 per cent of the on completion value. However in the current market banks will generally cap loans to 75 per cent of cost and still require 100 per cent debt cover by pre-sales.

This has resulted in developers needing to contribute greater equity into developments. The availability of mezzanine funding (within the parameters of pre GFC bank funding) is attractive to investors as it frees up capital, is less expensive than external equity and increases return on equity.

Private mortgage (including mezzanine loans) investments offer investors fixed interest returns commensurate with the risks associated with each loan. For developers, private mortgages (including mezzanine loans) can provide a more tailored funding solution that in many cases cannot be offered by the mainstream banks. As mezzanine loans are a small percentage of the total funding required for a development project it is a very attractive option for developers as it is considerably less costly than relinquishing equity and sharing development profit. Therefore the interest rate for a private mortgage or mezzanine loan is more reflective of the value to the developer rather than the risk to the investor.

Direct investment into private mortgages is often overlooked as most investors do not have the expertise to originate quality mortgage opportunities, conduct the due diligence process, document, settle and manage the loan. Winrome provides investors with the opportunity to invest directly in property based mortgages with the benefit of the services of a highly qualified and experienced loan origination and management team.

The types of transactions targeted include;

  • Loans to acquire development sites
  • Traditional mezzanine loans to property developers
  • Interim finance while senior finance conditions are satisfied
  • Top up loans to complete developments
  • To assist with developments in key regional growth areas (e.g. North West WA) that are out of favour with eastern states based financiers and banks

While each loan transaction may be quite different due to the underlying project we ensure;

  • The loan is secured by a first or second registered mortgage security
  • Loan to value ratios are based on independent valuations
  • There is a clear exit strategy such as pre-sales or approved refinance by a senior bank etc.
  • The loan is to experienced borrowers with a commercially viable project

The current property finance market provides an opportunity for private mortgage investors to benefit from investment in the residential property sector. The GFC has seen the withdrawal of many second and third tier lenders from the market. This together with increased conservatism and stricter lending criteria by the major banks means that property developers are less likely to secure the finance required to complete developments that previously would have been funded entirely by the major banks.

 

        Winrome Capital - Ground Floor, 180 Newcastle Street, Northbridge, WA 6003