2020: Year of private funding?

How the changing lending landscape and surge in demand for private funding could impact brokers

2020: Year of private funding?



Kevin Wheatley, director of Sydney-based Bayside Residential and Commercial Mortgages, works predominantly with clients from across the globe to deliver and maximise investments in property development. 

Wheatley established the firm back in 2009, bringing together years of experience as a logistician by trade, having worked on projects including shipping ports and waste to energy facilities. 

During his time as a logistician, Wheatley — one of Mortgage Professional Australia’s top ten commercial brokers for 2019 — says he realised a passion for the financial industry and the way it can make a difference to people’s lives.  

He says: “In logistics, there's a very high level of procurement and procurement requires funding.”  

This led him to take a natural step towards offering financial services. 

He says: “I've taken Bayside Residential and Commercial Mortgages from its one-man operation to what it is today, and this is just the beginning.  

“Our core focus this year will be raising the capital required for AusCity Capital, to take it to the next level.” 

In 2018, the volume of residential and commercial funds that came through to the business totalled $249m. The volume for 2019 is also estimated at around $200m. 

Wheatley is also currently looking to fill about $1.9bn in development funding for three projects in Australia, including one in Port Melbourne and another major development in Cronulla. 

Access to private debt 

The private business arm of Bayside Residential and Commercial Mortgages, AusCity Capital, aims to provide debt funding for construction development, stable income producing properties, unlisted and listed property securities, cash and fixed income securities. 

It gives investors access to premium construction and development projects that are not available on the public market. 

Wheatley explains that because banks are applying unyielding disqualifying criteria, such opportunities are usually fulfilled by non-conforming lenders who that premium rates and fees to their clients knowing that institutional lenders are rigid in their financing requirements. 

But through the establishment of Debenture Issuing Company, he says the AusCity Capital fund is able to raise private funding for strong projects with time sensitive needs as well as those projects that have been unable to raise funds from banks, due to overly prudent regulation stemming from the Royal Commission. 

He says: “Our investment vehicles allows us to compete with non-conforming lenders by offering commercial mortgages to institutional clients at more competitive rates.” 

Another key focus for Wheatley is for AusCity Capital to eventually become a non-bank.  

He explains: “Non-banks are here to stay. There's demand there now more than ever because of the lack of competition that's been in Australia, allowing the big four to monopolise the industry.” 

He continues: “What has been found by the Royal Commission now is only the tip of the iceberg… you'll see a lot more class action cases in the courtrooms this year because of banks’ misleading and deceptive conduct.  

“If anything, this has given us a lot more credibility to our business, because we're the ones now that are constantly finding an alternative funding solution for disgruntled borrowers.” 

He adds: “The private funding opportunities are going to be there for a long time.” 

However, he points out that his business could be negatively impacted if the government goes ahead with plans to scrap trail commissions.  

End to trail commissions 

The biggest threat to Australian brokers is going to be the disruption that will come from the 76 recommendations made by the Hayne royal commission, implementing the suggested crackdown on mortgage brokers. 

He explains: “Josh Frydenberg, the treasurer, is proposing that by July 2020 he is going to cut trail payments. Do you think that's not going to be detrimental to the industry?” 

Trail payments are designed to cover the time that brokers spend keeping an eye on their borrowers.  

“Because we want to make sure the borrower stay with the bank,” explains Wheatley. 

He continues: “Commission payments are not worth nickels and dimes; my residential division actually loses money because of the time it takes to process home loans and you get very little remuneration for it.  

“So if we have to rely on upfront commissions, which they're talking about cutting back as well, to a fee for service, no one's going to pay that.” 

This is a complete backflip to what he said in the lead-up to the elections, suggests Wheatley.  

He says: “That's going to be the biggest disrupter in the industry over the next six months, and we are preparing for that now.” 

But for borrowers, he argues, it is cheaper to keep paying trail payments than to carry the fixed costs of banks who will have to find alternative resources to the third party channels.  

He says: “If they cut trail payments, there will be three people here [in this firm] that won't have a job. We can't survive on commissions alone.” 

And he says the problem is that the government has not spent enough time talking to industry leaders. So now what is needed instead is a two year moratorium period for the government to consult the industry across the board.  

“These people need to come back to the table and talk to us,” he says. “This will impact the whole broking industry because they won't be able to afford to operate. 

“Where will their cash flow come from? it takes some two to three months to do a home loan, so how do we pay our staff and provide the services that the Australian community now expect?” 

The only way to find a pragmatic outcome will be on the back of sensible discussions and hopefully, by negotiating an outcome that's going to work for the entire financial industry.  

Looking ahead 

Aside from new regulations and proposals to scrap trail commissions, the year ahead is “looking really exciting” suggests Wheatley. 

He adds: “Not only with the development that we've got here in Australia, but the projects I've got offshore; I pick the eyes off of what I want to do offshore. Because you could end up wasting a lot of time.”  

So in between raising capital for major construction projects in Australia, Wheatley also has a waste to energy project where he needs to provide logistics support for a new waste to energy plant in Phnom Penh, Cambodia.  

He says: “We've already started and it will take about two years to complete.” 

Another work in progress that is going to make 2020 an exciting year for Wheatley is that he has seen a number of venture capitalists out of the US express a strong interest in his fund.  

He says: “We're really excited about where AusCity Capital is going and the interest it has attracted.  

“It will be a very niche managed investment trust where we are going to handle the projects we fund directly with the capital we raise, primarily from our high-end borrowers those that we have been working with for years.” 

“These financiers really have the capability and capacity to start a project and finish it: whether that is property development or infrastructure, waste to energy or port facilities.” 

He says he will also be launching a new trade facility for which AusCity Capital will be providing content input for, over the next two months. 

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