Ashurst Real Estate Finance Market Update

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    Australia's big 4 banks have reduced their exposure to residential developers, in one case by up to 56% since December 2016, as concerns grew in the run-up to this year's federal election over over-supply and FY19's declining property market.

    Ashurst real estate finance partner Ken Nguyen said that banks are looking after established developers with a proven local track record for delivering projects, and a relationship of trust. 

    Ashurst has acted for banks, non-bank financiers and developers on major projects in 2019, including Gurner's ANZ-funded Saint Moritz development in St Kilda, UEM Sunrise's Westpac-funded 92-storey Aurora Melbourne Central development in Melbourne, and Capital Alliance's new Marriott Hotel in Docklands.

    "The Ashurst report shows that banks' pricing for development deals, after trending upwards between 2015 and 2018, has stabilised in 2019. And banks are allowing higher loan-to-value ratios to developers, up from 56% in 2018 to 61% in 2019, as well as occasionally funding deals without 100% presale debt coverage," Mr Nguyen said.

    "This is a big change from 2018, when banks often required 110% or even 120% presale debt coverage."

    Meanwhile, leading non-bank financiers, including CVS Lane, MaxCap, Qualitas and Wingate, are taking an increasingly institutional approach to risk. Many non-banks have linked up with major Australian and offshore institutions, with rigorous mandates.

    "Non-bank financiers are increasingly focussed on first-mortgage transactions, rather than mezzanine-finance transactions. They also need developers to have more 'skin-in-the-game' before they will lend money," he added.

    "Leading non-bank financier loan-to-value ratios are now an average of 65%, compared to a high of 72% in 2017. That has narrowed the gap between banks and non-banks in relation to LVRs, from 9% in 2018 to 4% in 2019.

    "The non-banks have also responded commercially to slowing presales in 2019, funding deals with an average of 70% presale debt coverage. Presales are picking up again now, though, with post-election sentiment hopefully presaging a strong market for 2020."