Non-bank products protect developers

by Rebecca Pike04 Oct 2018

A non-bank finance group has launched two products to protect developers from failed settlements and lower pre-sales across Australia.

Chifley Securities has developed the products to tackle the slow housing market.

The first product is in the form of a guarantee policy, which secures a percentage of the presales in case purchasers cannot complete once the development is finished. This is a problem they have found increasingly as the property market tightens.

The second product layers an additional loan to refinance any unsold apartments (residual stock) at the end of construction.

The aim of these products is to allow the construction loan to be paid back on time and the developer takes his share of the profit.

Chifley Securities principal, Dominic Lambrinos, said, “We have launched the products to protect developers during what is now a well-publicised slowdown in the market, where off the plan purchases are not being completed at settlement as tighter lending controls are being put in place and much lower activity by investors.

“This is particularly apparent in markets like Brisbane and Perth, where there has been a big drop in settlements of new dwellings.”

The home property sector has come off 7.3% in Sydney and Melbourne over the last 12 months, with developers facing difficult hurdles to meet the major lenders’ tougher presale conditions for construction loans.

Lambrinos explained that some banks are asking for a 100% debt cover or more on pre-sales as one of their condition's precedent. Private lenders will usually lend with lower pre-sales levels but at a higher cost of finance.

He noted that investors, especially from overseas, have fallen away markedly over the last year, when they paid deposits up to two years ago on dwellings off the plan in developments, whose values have fallen from what they were when the deposits were made.

He added “We expect that the tighter finance conditions and less investment activity will weaken the dwelling market further over the next 12 months, causing a worsening problem for developers who gained finance on the basis that settlements will be made.

“We have tested the product on a few projects that were facing collapse because of the settlement drop-off and believe it will quickly gain popularity as property market and lending conditions tighten over the next 12 months."

Chifley Securities lifted its lending to developers and landowners from $1.8b to $2b in the 2017-2018 financial year, with a large proportion of loans going to projects which are underway.