22 Oct The little black ad-dress lenders can’t resist
by Fiona Roberts, Chief Operating Officer, IBN Direct: Alternative Funding Solutions
Appearing originally in the Urban Developer magazine, Issue #91, Sept/Oct 2014
Units and townhouses are the property market ’s new ‘Little Black Ad-Dress ’, netting premium returns and 70 per cent funding options , leaving Aussie dream homes sitting on the rack.
Private lenders – high net worth families, superannuation funds and managed investment schemes – are financing the growing demand for high density housing without a single pre-sale.
Scott Roberts, whose alternative funding company IBN Direct sources private investors, said apartment popularity was simple: units were in fashion and moved fast.
“I have lenders that just won’t finance houses,” said Mr Roberts, whose national business – based on the Sunshine Coast – has access to up to 200 private funders nationwide.
“And that’s because units and townhouses are easier to sell – the stock turns over quicker.”
He said while houses were still the ‘Australian dream’, the unit market was not only an easier point of entry for new owner-occupiers, but for first-time developers as well.
“The biggest selling points for us is that everyone has been conditioned by the bank that they need pre-sales and that is our big point of difference,” the 46-year-old said.
“But when you’re building townhouses many of our funders do not require any pre-sales compared to banks which will require up to 100 per cent pre-sales to have 100 per cent of their risk covered.
“And when the developer doesn’t need to sell off the plan, buyers will pay a premium price because they’ve been able to walk into the unit, go out on the balcony and take in the vista – and virtually every unit these days has a view of oceans, rivers, cities or mountains.”
Mr Roberts, who was a state manager of a leading aggregator before starting IBN Direct 10 years ago, said private lenders were plugging the finance gap as the major banks knocked back an average of eight out of every 10 development deals that landed on his desk.
“We had one case where a developer with a multi-level project near the Brisbane CBD – who had a nod and a wink from their bank that they would fund the deal – started the project themselves only to run out of money and have the bank change its mind,” he said.
“The client didn’t want to get pre-sales so we funded it to 70 per cent of the gross realisation. When buyers were able to inspect the units they wanted to move in. In fact, $11.5 million in properties sold almost in one weekend; with most of the units selling above the pre-construction asking price.
“The problem for a lot of small- to medium-sized developers is that there are a lot of big boys cashed up who have no funding problems or delays to get their projects market-ready.”
Mr Roberts said another private loan settled for an 18-stage Sydney development also revived a project the bank had stalled for 12 months.
“The client had been with their bank for 14 years and had already done the first 10 stages of their 18-stage development,” he said.
“They got to stage 11 and the bank said, ‘Your debt limit has been reached. Sell 100 per cent of properties on pre-sales before we fund this.’
“We were able to source $20 million in private funding at 70 per cent of the valuation at 14 per cent per annum, which, compared to the bank’s 6 to 8 per cent, was a bitter pill to swallow.
“But we had a funding solution in four days for a project that had stalled for 12 months, and he was able to buy out an equity partner, didn’t have to do pre-sales or discount his prices, didn’t have to employ a marketing manager, capitalised is interest and fully covered his construction costs.
“After settlement, once construction had started, he placed two advertisements in the local paper and sold more than $20 million in property himself. For him, it was a great deal.”
Mr Roberts said the main reason banks knocked back some developers – even though many owned the land earmarked for construction – was due to insufficient pre-sales, a high loan-to-value-ratio (LVR) and inexperience as a developer as well as inexperience for a new project type.
“Private lenders will fund 70 per cent of gross realisation for a townhouse/unit development in South-East Queensland for loan amounts up to $7 million just about every day of the week,” he said.
“For consumers as well as lenders, units and townhouses are in vogue.
“And this is because there has been a conscious shift of people not wanting to spend two to three hours in a car to get to work; and a larger number of urban couples with no kids that has spawned an increase in demand for units making these developments low risk.”
Queensland Government figures pitting housing sales to apartments on the Sunshine Coast also supports the claim that higher density housing is in vogue, with an increase of 26 per cent in sales for units and townhouses compared to 19 per cent for houses in 2013’s last quarter.
Likewise, approvals for units and townhouses also increased a massive 216 per cent compared to a 21 per cent increase in housing development approval for new Sunshine Coast homes.
Mr Roberts said houses were now becoming even higher density to compete with the apartment allure, with housing blocks commonly found from 200 sqm throughout South-East Queensland.
“The reality is houses are also much higher priced and harder to secure funding for young buyers wanting to enter the market,” he said.
“There’s this whole new generation actively seeking higher-density living and all the low-maintenance, low-commute, low-cost perks that come with that. My six-year-old son has even created a gated complex on his Minecraft game.
“At six, he has grasped the concept of low-, medium- and high-density living.
“Townhouses and units are the new little black ad-dress, and private lenders are happy to put that on credit for you.”