Is Non-Bank Still A Dirty Word?
Essence – Woolloongabba, Brisbane. Project Value $43m, supported with a Newground Capital Preferred Equity facility.
At a time when many developers are finding it harder than ever to procure debt finance from major banks, we find ourselves asking why ‘non-bank’ lending is still a dirty word in many quarters.
Daniel Erez, Managing Director of real estate investment management group, Newground Capital, explores the non-bank lending landscape.
Banks Lose Their Appetite
The construction finance sector was almost solely the domain of the Big 4 banks until 2015 when the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) imposed tighter regulatory requirements.
Tightening loan-to-valuation ratio prerequisites for bank lenders had a pronounced effect, particularly on the residential development sector, with the major banks losing much of their lending appetite.
“While the four major Australian banks still hold around 90% of all commercial real estate debt exposure, they have sought to limit their exposure, creating growth opportunities for non-bank lenders such as Newground Capital,” Erez says.
“However, despite the growing number of developers and investors turning to alternative lenders, non-bank lending is yet to experience the same mainstream acceptance as the Big 4."
Making The Switch From Banks
Erez believes we’ve been unwittingly conditioned from childhood to turn to one of the Big 4 banks for all of our lending needs.
“Conditioning begins with the likes of The Commonwealth Bank’s Dollarmites school banking program, and continues well into adulthood with banks counting on customers to choose familiarity over the uncertainty of changing to an alternative lender.
“People fear changing banks, particularly away from the Big 4, so it’s little wonder the bigger leap of non-bank lending is subject to myth and misinformation.”
Erez says one of the biggest concerns about non-banks comes from a well-fed perception that Australian banks offer unprecedented security.
“In comparison non-bank lenders are often unjustly portrayed as a second-rate or riskier option.
“The facts are that non-bank lenders have been operating successfully here in Australia for many years, and have been well established in the US and Europe much longer.”
Stylish interiors at Essence, Woolloongabba. 89 one, two and three bed apartments, expected completion 2018.
The Non-Bank Lending Landscape In Australia
In Australia, the non-bank market is continuing to develop as demand shifts focus. Over the past decade several other active property funds and investment managers have funded or invested in more than $15 billion in property value.
Also in this space are highly experienced property developers lending to localised and highly specific projects, such as high-rise apartments in Melbourne’s CBD, as well as family office centric investors.
“Newground Capital approaches the capital stack with flexibility in mind, which may see us providing either ‘stretch’ senior, mezzanine or Preferred Equity for construction projects located in Sydney, Melbourne & Brisbane.”
“And while the majority of our current projects are in the residential space, we also are looking for project partnerships in both the retail and commercial sectors.”
Erez says there are some key considerations though when it comes to choosing a non-bank finance solution.
“For instance, does the firm operate under an Australian Financial Services Licence (AFSL)?
“Newground operates under a wholesale AFSL where investment parameters are dictated by our investors – not APRA. As such, we have money to lend and can be flexible where the major banks cannot.
“Also check whether the lender has settled comparable transactions and whether they use tier one consultants such as valuers and lawyers.
“And most importantly do they actually have the money to lend and have settled comparable transactions in the past?”
With “non-bank” lending fast proving itself a viable and agile solution to the lending gap left by major banks, it’s earned the right to no longer be a dirty word.