The rise and rise of non-bank and alternative funding

Until relatively recently, Australia’s major banks dominated construction and investment lending. But within the next 12 months, the developing capital landscape will look quite different. Thanks to APRA and ASIC restrictions, new funding models have arrived – some with very different product offerings.

We recently surveyed over 100 debt capital providers, and the majority told us they expect both non-bank investment lending (61%) and non-bank construction lending (63%) to increase.And this is already proving to be true.

The major banks are restricted on their ability to lend to residential developer customers if the debt is not covered at 100% by pre-sales. For investment lending, the facility must be able to demonstrate two times interest cover.

Unsurprisingly, developers and investors need to look at other options – and this is creating a new competitive non-bank capital space in the market.

Non-banks to loosen credit criteria in the year ahead

As our research report 2018 State of Play predicts, this space is already getting competitive. And as competition increases, we expect to see non-banks’ credit criteria become even more flexible. In fact, we’ve already seen non-bank capital margins falling and the relaxing of credit criteria will follow as non-bank capital competes for opportunities in the market.

On top of this, as the development market slows down the demand for credit is reducing, putting further downward pressure on margins in the non-bank space.

However, given the banks have tightened criteria and availability of their capital for developers, we expect to see banks increase their margins – effectively bringing the bank and non-bank sectors closer together in terms of pricing. In fact, we are already seeing this emerge in markets.

It’s all about what’s right for your project

Non-bank funding alternatives are exactly that – alternative capital to what banks can offer. So in this sense, bank and non-bank capital are not really competing directly. As a commercial property finance intermediary, our role is to understand your needs and ensure you get the best access to capital for that project – bank or non-bank.

Real estate debt capital markets are very fluid (particularly at the moment), and evolving quickly – we’re seeing new entrants set up funding lines or deals at a rapidly growing rate.

Having built strong relationships with all these capital partners, we’re confident we can find the best risk adjusted pricing for your needs.

What’s the outlook for alternative funding?

Banks will always have a place with our clients – in particular servicing those relatively lower on the risk spectrum. APRA has made it clear it wants the banks to be well capitalised, but with low risk debt capital – what banks should be doing in any market.

This has created the opportunity for non-bank financing to emerge and the growth has been rapid – and we expect it to continue over the medium to long term. If you’re looking for a flexible funding alternative, we have the market knowledge and partnerships to provide you with some options. We’d love to hear from you. And don’t forget to download the 2018 State of Play report for more insights for the year ahead.

Regards,

Domenic Lo Surdo
Executive Director