Challenges ahead for offshore developers

The number of offshore developers in Australia has risen dramatically over the past five years. Knight Frank Research data shows Chinese developers and investors only held two per cent of total development site sales in 2012. By the end of 2016, it had grown to 38 per cent.¹

In China, fears of a slowing economy have led to an increase in outgoing capital in search of a safe haven: enter the Australian market. Australia is appealing to offshore developers for a number of reasons. Our stable government and strong education system provide investors with confidence. And, compared with other potential countries to invest in, the Australian dollar is more attractive. Our foreign investment taxes, despite a recent rise at the end of 2016, are minimal when compared with other countries like Canada.

However, in 2017 offshore developers are faced with a number of challenges.

Access to bank funding

The number one challenge that offshore developers will face this year is access to bank funding. Why?

There are only four major banks, two sub-majors and a handful of second tier banks. This means there is a narrow pool of bank lenders for foreign developers to obtain funding from.
APRA is closely watching the banks’ lending activities in the development space, which has led to reduced liquidity. The banks are tightening their lending criteria. They are effectively closed to ‘new to bank’ clients, particularly for developers with minimal to no experience developing in Australia. This is very much prevalent in the mid to low tier space (developments with less than 200 units). Banks are also concerned about their exit strategy for residential projects. Substantial tightening in credit to foreign off-the-plan purchasers means there is increased settlement risk in off-the-plan sales.

Constraints on capital

Meanwhile, there are also constraints on offshore developers trying to bring capital from their own country. As we’ve heard from a number of Chinese clients, taking capital out of China has become increasingly difficult and at times impossible. This is a real problem for those developers who acquired sites on terms last year and were expecting equity funds out of China.

Construction costs

Construction costs have been on the rise across all geographical markets in the past 6 to 12 months – adding to the overall cost of development.

Higher costs of non-bank lending

If any developer is struggling to secure bank funding, they will need to consider options with the non-bank lender market. They tend to have a higher cost of capital – so their interest rates are likely to be higher than traditional bank funding.

Non-bank lenders may also have more limited available capital. That means developers have one chance at securing this funding. If complications arise, the lender will move on to the next de-risked deal.

There is a silver lining

With all this in mind, there are some upsides for offshore developers:

There are still opportunities in Australia. The Federal Government has a mandate for increased foreign investment to add to the housing stock.²
The non-bank market tends to offer higher gearing loans, with fewer equity requirements. This could help if you’re struggling to obtain funds from China or want to hold equity for future projects.
Non-bank lending costs a little more in the short-term but it lets you get runs on the board. It is much easier to obtain funding once you’ve build a sound reputation here.
There is no denying the challenges for offshore developers in the current market. First development deals that were placed last year would not be fundable in the current banking market. However, we remain confident in the non-bank opportunities that the market presents.

If you are an offshore developer currently facing such challenges, or act as a development consultant, please get in touch to discuss your options.

¹ Ciesielski, ‘The Rise of Chinese Developers in Australia – January 2017’, in Knight Frank Research. January 2017, viewed on 27 February 2017, http://www.knightfrank.com.au/research/the-rise-of-chinese-developers-in-australia-january-2017-4359.aspx

² Ciesielski, ‘The Rise of Chinese Developers in Australia – January 2017’, in Knight Frank Research. January 2017, viewed on 27 February 2017, http://www.knightfrank.com.au/research/the-rise-of-chinese-developers-in-australia-january-2017-4359.aspx