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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 in Australia. 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 have been deemed too risky.

Consequently, obtaining financial assistance in property development is currently regarded as exceptionally difficult in the Australian credit market. Regulatory changes and investigation into lending practice by ASIC, APRA and a Royal Commission have all created a narrow view in a limited lending market.

Before commencing any property development project, one of the most crucial factors to consider during the preliminary stages 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 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 and financial associations 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 consider overly exhaustive processes and reject loan applications despite their ability to reimburse the credit.

Consequently, loan application assesment creates lengthy and uncertain process for the borrower only to discover that their application has been denied.

Conditions and Relevant Factors

Banks, however, have been found to be very discerning in accepting applications and endorsing them.

Regular assessment and evaluation 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.

Furthermore, the development loan application is structured in a way that may convince banks to provide 70% to 80% of the total cost of the project.

Obtaining approval from banks can be a extremely difficult. Therefore, the arrangement may potentially appear to look great on paper,  only to reveal down the track that the borrower fails to satisfy the requirements and conditions in the bank’s checklists.

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

Private Lenders

Private lending has been around for decades, however, until recently there has been a rapid growth in the property development market. Borrowers are seeking alternative means rather than engaging with banks. As more banks are witnessing the negative implications of COVID-19 with regard to economy loss and poor customer service, private lenders have seen a sudden surge of interest from customers particularly property developers due to higher success rate in providing monetary assistance in a reasonable amount of time and without the hassle.

While private lending has gained significant momentum during the pandemic, some borrowers prefer the traditional option of opting for the banks as the better choice due to lower interest rates, generally offering approximately a 5% to 6%1 interest rate depending upon the borrower's credit background. Yet, they are still faced with longer wait times in their loan applications.

In contrast, the interest rates in private lending are initially found to be higher by approximately 10%2. However, the advantages have proven to be substantially beneficial to the borrower and include a quicker and more straightforward approach with faster turn around period and higher success rates.

Some of the benefits in private lending consist of the following:

  • 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 the private lenders can offer. They include the following:

  • 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 to be financed through a variety of private loan options, it will help to first determine the “size of the project”. This is normally categorised by the following:

  • Light refurbishment: normally involves rectification of ceilings, walls and floors of the property.
  • Heavy renovation: this requires more than aesthetic changes that may include moving internal walls, electric wiring and plumbing wor.
  • Ground up: a property development that 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, corporate lenders have seen a need to push for restructure and reconsideration in the processes involved in loan approvals including the need to improve better customer service and ethical behaviour. As such, many developers have resorted to obtaining funding from private lenders instead of banks.

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.

As a key legal expert within our Commercial Division, Elizabeth Ong, Special Counsel and Banking & Finance Lawyer, has over 22 years of experience in the banking, finance, commercial and construction industries. Elizabeth is admitted to practice both in Australia and Malaysia.  For tailored assistance and legal advice please contact Elizabeth Ong today via phone on +61 3 9822 8588 or you can email us here. Find out more about our Banking & Finance legal services here.

References: 1. https://tradingeconomics.com/australia/bank-lending-rate; 2. https://www.canstar.com.au/home-loans/private-lender-home-loans/

Insight by Bianka Duzelovski

Contacts

Elizabeth Ong

Special Counsel

Elizabeth Ong

Special Counsel
LL.B.(Hons) CLP GDLP
Elizabeth is committed to providing world class, comprehensive commercial solutions and corporate advice tailored to the best interests of her clients. She is fluent in written and verbal English, Mandarin, Cantonese, Hokkien and Malaysian languages.

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (Hons) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Helen Mastos

Special Counsel

Helen Mastos

Special Counsel
LL.B, BA
Helen is a Special Counsel with over 25 years of experience in Commercial Litigation and Commercial Law.

Bianka Duzelovski

Lawyer
LL.M, LL.B BMS
Bianka has an extensive background both in private practice and as internal counsel for a number of high-profile building and commercial businesses so provides the perfect balance of legal skills to our Commercial, Disputes and...

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