The role of the financier has traditionally been a silent source of capital in the property development process. More recently, however, there have been significant changes in the industry, resulting in the tightening of access to bank funding resulting from international banking regulatory changes. These changes are forcing developers to look at alternative pathways to ensure the viability of their projects.
The first marker of change, the Global Financial Crisis, was felt in 2009 when the global financial markets collapsed, creating a wave of devastation that forever changed our banks’ outlook on risk, funding models and lending behaviour.
The fallout saw the banks shift to a much more conservative position on funding and thus, the access to capital for ambitious and innovative projects became limited as the perceived investment risk outweighed the potential reward.
Identifying a gap in the market and a genuine need to deliver funding across various asset classes, in stepped the private equity financiers, who could play the role of navigator, advisor and strategic solution rain-maker to bring complex projects to life when traditional bank debt had all but come to a halt.
Fast-forward six years to 2015 and the banks had more or less stepped back into their pre-GFC position, albeit with a more risk-averse outlook, working alongside financiers and equity partners to deliver funding. However, like the calm before the storm, the market then underwent the unprecedented construction boom of 2016.
This boom caused concerns, bank lending become tied up in projects pushing their development lending limits to the extreme, and this, combined with concerns of oversupply, meant banks again retracted funding and the impact was felt again.
But this time, the restrictions came from all angles and all at once. Banks tightened their lending criteria and decreased the Loan to Value Ratio for developers, whilst simultaneously cutting off finance for overseas buyers, and restricting the number of foreign sales.
These unprecedented regulatory changes meant there had never been a more important time for private financiers to step into a more strategic role and guide developer clients through a complex web of funding, planning and regulatory requirements.
And so, in this climate of unprecedented challenges, private equity providers and developers have come together as true project partners, providing value at every stage of the development process, rather than simply supplying debt to projects at an arm’s length.
A case study that attests to this is Wyndham Harbour Marina. Marinas, in any economic climate, are complex projects to fund.
At first glimpse, this seemed an absolutely impossible feat. The challenge we faced was to develop a funding strategy that would meet the conditions of the council development agreement while simultaneously allowing the developer to sell the first few stages of land.
So, we worked together with council and the developer, to turn traditional marina funding strategies on their head by mapping a funding solution that saw the profit from the land development fund the marina delivery concurrently.
In such a complex case, we saw a need for our role as the financier to transform into the advisor, working to compartmentalise and de-risk the project at each stage, creating a stable investment that was appealing for banks to then step in to provide debt once the project had been sufficiently de-risked. Managing a close relationship with council and various stakeholders, Monark Property Partners created a funding roadmap in which the profits from the land sales could be escrowed to contribute towards the marina construction, and raise senior debt for the remaining stages of the project.
Monark Property Partners’ financial strategy meant that an innovative funding model was implemented that ensured the project could be successfully delivered against unlikely odds.
While these pressures continue in the market, developers should expect the funding gap to remain well into the future. There is no doubt that if developers don’t adapt, they run the risk of not securing funding for projects, and the myriad consequences that follow this.
To combat this funding gap and ensure a prudent way forward, developers will need to turn their attention to four key elements; financial advisory, joint ventures, minimising settlement delays and stature of the developer.
As demonstrated, the relationship between the developer and financier is intertwined in the success of the development. More than merely a source of capital, the financier is now the strategist that will navigate the red tape to see the project come to fruition.
The property market can expect to see an increased emphasis on joint venture projects and an alternative to bank funding. This will again place the emphasis on partnerships and trust, asking the industry to turn to itself for support.
Minimising delayed settlements
The funding gap is significantly impacted by the perceived difficulty of settlement for foreign investors. It will be imperative for developers to understand and communicate to their purchasers the restrictions that foreign purchasers face. Alternative funding solutions will come to fore by way of foreign bank partnerships and the alike to minimise the delay.
Stature of the developer
The banks will continue to focus their attention on low-risk, high-return projects and will fund based on the experience of the developer, creating barriers for entry for new-to-bank developers. De-risking to attract the interest of banks will be essential for developers.
Gone are the days of private equity as a silent contributor. Addressing the funding gap demands strategies based on robust relationships with fellow industry players to create collaborative partnerships. This requires a much more holistic and innovative outlook, but together, with financiers and developers as partners, we can successfully navigate this complex funding landscape and deliver complex projects.