With banks tightening loans to developers in recent years, alternative lending providers have mucked in to meet the increasing demand for capital. Boutique groups like Monark Property Partners now find themselves funding major projects and quietly providing hundreds of millions in senior debt to developers.
Since 2013, Monark has completed more than 49 transactions and raised $525 million in capital. We spoke with founder and CEO Michael Kark about the long term funding outlook for developers and what it’s like to play the role of bank.
How did Monark become a first choice lender and partner for developers?
Monark Property Partners is a joint venture with the Bori Liberman family office, Jagen. As our majority shareholder Jagen provides our business with a sizable balance sheet to deploy into property transactions. When we started the business five years ago our focus was mainly on mezzanine debt. Over time, we found that mezzanine debt became a commodity and a race to the bottom to see who could provide it at the cheapest possible price. We started looking more to equity transactions and providing senior debt to developers. Banks were becoming reluctant to fund developers, so we would be approached, or offer our services and equity to good developers to make up the finance shortfall. We’ve found this to be very profitable.
We’re very much a boutique venture but we have close relationships with major developers, particularly in Melbourne. They would come to us and say “look, we’ve got the development site, we need to settle because we couldn’t get sufficient bank funding and we need to preserve our equity for the planning approvals.” Provided it’s a high quality development we’re happy to help.
What are your key criteria for lending?
Our criteria involve the feasibility of the project. We look closely at the development site and the developers and if we are satisfied, we’re prepared to provide up to 75% of valuation. The credibility and skill of the developer is really important. For example, we’ve done a number of projects with Element 5 as both the developer and builder. We look at our relationship with developers in a broad sense and identify those we can become a long-term capital partner through multiple projects.
Because we are there at the start of the project, we offer an end-to-end solution. Once the project is approved, we assist the developer in raising bank debt for the construction and provide mezzanine debt for the construction. We’re involved at settlement of the site, right through the planning process, presale procurement, and all the way through construction.
Examples of developments you’ve funded?
A recent example is a development in Prahran by Goldfields. It’s a terrific site and we were very excited by the opportunity to assist the developer in settling the site, council approval, and so on. It sold out within three months, which was fantastic. All buyers were local owner-occupiers, which showed the quality of the development.
Residential developers, in the true sense of the word, are your preferred partners?
What we have found is the boutique projects, in a desirable location, using top-tier architects and interior designers, where the emphasis is on quality not quantity, have been more successful.
We are not strictly residential though. We have a joint venture on an industrial project in South Sydney at the moment. We’re open to other industrial opportunities however the market has been more conducive to residential.
What trends do you see playing out this year and next?
I think the residential trend will continue with less emphasis on investor purchases and overseas purchases and more owner-occupier geared developments. Previously a lot of stock was sold through investment channels, basically selling to a particular price point where you can achieve an appropriate yield or an investment return. The purchaser profile has definitely changed and will continue to do so.