Non-traditional lenders more attractive than the big four

The past 18-months has seen non-bank lenders become a more attractive financing option as the big banks tighten their lending.

One such non-bank lender to capitalise on this shift is Brisbane commercial finance brokers Red & Co, who over the past 18-months have arranged $75 million of finance for developers solely from non-bank lenders.

"From 2013 to 2016 we entirely financed our clients through major banks including Bank of Queensland and Suncorp," Red & Co principal David Laverty told Matthew Cranston of AFR.

"But from 2016 to today we have actually gone 100 per cent non-bank finance because previous deals we have been getting with the banks are not there in terms of leverage. A lot of our developer clients have moved to non-bank because the loan-to-value ratio is higher, so less equity to put in, and they can still use other forms of equity like preferred equity or mezzanine debt."

Shadow banking, the term used for lending in the non-bank sector, has been growing profusely in the face of imposed restrictions on traditional bank lending. It has been referred to as a phenomenon in mid 2016. In March 2017, the Australian Prudential Regulation Authority (APRA) clamped down on interest-only loans from the major banks in a bid to cool the hot property market, spurring the need for alternate funding options.

The urging for banks to improve their prudential controls from regulatory bodies such as APRA and ASIC have caused the big lenders to adjust their development lending parameters. Many have increased their apartment pre-sale hurdles to achieve reduced risk of lending; initiated tighter rules on the volume of sales to foreign buyers; and some introduced unfair terms into their contracts.

Red & Co managed to secure loans on behalf of clients with fairer terms and zero pre-sales (where the project is no greater than 30 apartments).

"Given off-the-plan sales in Brisbane have been harder to make, a lot of clients like this and will chance their arm on selling on the way through and at the end," David Laverty said.

"Off-the-plan sales can be very expensive so if you have a developer who is effective at selling on completion at a lower commission rate through a local agent this works for them."

Many non-bank lenders also offer flexibility if the project doesn’t reach its projected sales upon completion.

"If they get to the end and have only sold half of their stock they refinance to a cheaper, more long-dated product – not a construction loan with default penalty interest and more fees and threats of administration but something that allows them to work through the last few lots in an orderly fashion.

"The risk for developers is picking a non-bank lender that doesn't offer these sorts of secondary products so they end up in a fire sale dealing with a group putting them under extreme pressure to get their money back."

A Royal Commission investigating misconduct within the financial services sector was established in December 2017 and since its inception has alluded to a dark underbelly of traditional lenders and finance brokers in Australia.

A final report will be published in February 2019, but many are speculating that we may see even tighter controls imposed on the major banks when the interim report is released this September.

This will naturally result in more favourable conditions for non-bank lenders, bringing the once non-traditional form of finance into the norm.