Finding a way through the maze of a tight debt market in Australia
While Australia remains an attractive destination for foreign investment, offshore developers must grapple with the reality that financing even sound projects will come with its fair share of challenges. So what are the key issues underpinning these obstacles, and how can the process be made more straightforward?
We consult Brae Sokolski, CIO of respected commercial real estate debt and investment specialist, MaxCap Group and Mark Pomeroy, CEO of leading development and project management firm, Pomeroy Pacific, for the answers.
TAE: To paint the picture for us, how would you sum up the debt market for 2015 and what are your expectations for the property debt market for 2016?
BRAE: 2015 was an incredibly volatile year for the debt market. It was very much business as usual for the first half of 2015 with banks conservative but actively lending, and developer and investor confidence remaining high. However, mid-way through the year, the situation changed dramatically with further implementation of Basel III capital adequacy reforms in Australia through the Australian Prudential Regulation Authority (APRA).
APRA’s role is to regulate banks, insurance companies and superannuation funds, credit unions, building societies and friendly societies. Banks were instructed by APRA to hold more capital against real estate loans. We estimated that an additional $20 billion to $30 billion was imposed on capital ratio allocations against commercial real estate mortgages. Consequently, we witnessed major banks being unable to satisfy the pent-up demand for housing debt and, therefore, a scramble by developers to seek alternatives sources of capital.
As a result and to ensure developers could still have their projects funded, many developers have had no choice but to reach out to alternative sources of capital in the face of a tightened debt market. This alternative source of first mortgage capital is increasingly being provided by institutions such as super funds and private equity investment managers and we expect this new “Fifth Pillar” of capital to continue during 2016 and remain a permanent addition to development funding options.
The process of securing legitimate alternative sources of finance will be crucial this year for the viability of the industry as a whole and more broadly supporting Australian economic activity that is largely underpinned by the housing and construction industries. Whilst traditional bank funding will remain an option for developers with a local track record and existing bank relationships, compared to many of the deals in the past, the funding process will be more protracted and additional equity will be required.