The Relationship between Property Developers and Private Lenders

Property Developers in Australia. Setting the scene.

"No money, no project!" is a frequent issue for Property Developers. While the Government has introduced a number of initiatives to assist businesses, workers and home owners, the relationship between property developers and banks has seen a significant and rapid decline since the COVID pandemic. Many banks have ceased accepting applications from property developers particularly as they are deemed too risky.

As a result, obtaining financial assistance in property development is often exceptionally difficult in the current Australian credit market. Regulatory changes and investigation into lending practices by ASIC, APRA and a Royal Commission have all contributed to a narrow view in a limited lending market.

Before commencing any property development project, one of the most crucial factors to consider is having a clear understanding of your financial position and budget. During these stages, a borrower should always have a realistic approach and good overview of the borrowing amount and entitlements, these include the processes and expenses involved.

Oversight Issues

Australia has an ongoing credit gap that appears to have grown, especially since the sudden changes and the environment seen in the pandemic.

Today, many Australians have realised that banks and other traditional money lenders are not as enthusiastic about relinquishing their money easily. Lengthy investigative assessments and due diligence pertaining to the risk level of the borrower are common and while few Australians have a low risk profile, banks still engage in overly exhaustive processes and often reject loan applications despite a borrower’s ability to reimburse the credit.

Conditions and Relevant Factors

Banks are often very discerning in accepting applications and endorsing them.

Regular assessment and evaluation by a lender in granting a development loan will usually consider the following factors:

  • Property developer’s risk level
  • Reputation
  • The sale price of the collateral
  • The property value at completion of the development
  • Security of the project
  • Size of the property
  • The location of property
  • Zoning security
  • Track record of those involved in the project
  • In depth assessment on the building company involved

Ulitmately, the goal of the conventional lender is to make sure the applicant’s ability to repay is checked thoroughly which includes their income and expenses.

With such rigmarole in this space in Australia, alternative private lenders have been able to fill gaps left by the banks.

Private Lenders

Private lending has been around for decades, however, given rapid growth in the property development market in Australia, borrowers are seeking alternative means. Private lenders have seen a sudden surge of interest from customers due to higher success rates in providing monetary assistance in a reasonable amount of time and without as much hassle.

While private lending has gained significant momentum, some borrowers prefer the traditional option of bank lending due to lower interest rates, generally offering approximately a 5% to 6% interest rate depending on the borrower's credit background. Yet, they are still faced with longer wait times in their loan applications.

In contrast, interest rates in private lending are usually higher by approximately 10%. However, the advantages have proven to be substantially beneficial to borrowers and include faster and more straightforward approach and higher success rates.

Some of the benefits in private lending are:

  • Less stringent requirements
  • Flexible lending rates
  • Borrower has full control over the process
  • Possibility of credit improvements
  • Fast loan approval and funding
  • Simplified loan process
  • Competitive pricing
  • Borrowers can also gain headroom in debt sizing and financial contracts
  • Short term loans offering long term use

Property Development Loans you can Borrow

There are many types of loan structures which private lenders can offer. They include:

  • Commercial mortgages - apply to various types of properties including retail shops, warehouses or anything that is not residential property based. This loan option can assist property developers to spread the large investment over a certain period.
  • Buy to let mortgages - applicable to landlords with large property portfolios and are suitable for properties required for purchase.
  • Bridging finance - this type of loan differs from a property development loan and should not be confused. It allows the borrower to pay for construction as well as other costs during the developmemt process and is significantly different due to the considerational factors required in assessing the size of the property.
  • Auction finance - normally the quickest method of obtaining a property at a discounted price and does require assistance from a lender who specialises in this type of purchase.

Therefore, when considering property development finance, it will help to first determine the “size of the project”. This is normally categorised by:

  • Light refurbishment: normally involves rectification of ceilings, walls and floors of the property.
  • Heavy renovation: requires more than aesthetic changes that may include moving internal walls, electric wiring and plumbing work.
  • Ground up: requires the most involvement - it normally starts with a parcel of land and often involves heavy refurbishment.

In summary, Australian banks are being overlooked by borrowers due to their tighter lending requirements and procedures. Consequently, they have seen the need to push for restructure and reconsideration in the processes involved in their loan approvals including the need to improve customer service. As such, many developers have resorted to obtaining funding from private lenders instead.

Although private lending offers tremendous benefits in the property and development market, it is always advisable to seek financial and legal advice:

  • before being locked into any agreements particularly when the interest rates are generally higher in private lending; and
  • most importantly, to understand the securities to be given and the legal ramifications if the borrower’s obligations are not met.

Two of our senior lawyers and firm principals Meghan Warren and Kristy Muhlhan have over 23 years of experience between them in banking, finance, commercial and construction industries.  For tailored legal advice and guidance please contact either Meghan or Kristy via phone on +61 3 9833 8588 or email our team here.  Find out more about our Banking and Finance legal services here.

References: 1.; 2.

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