A recent webinar on How to Secure Non-Bank Construction Funding provided a fascinating snapshot of an industry currently undergoing rapid growth and change.
Aimed at aspiring property developers and investors, as well as the professionals who service the property development industry, the event was hosted by
The Urban Developer and featured a panel of four industry experts:
- Clinton Arentz, Head of Lending & Property Assets for leading non-bank lender Trilogy Funds
- Luana Kenny, Managing Director of property valuation and advisory firm M3Property
- Tass Assarapin, Partner at QS firm Mitchell Brandtman
- Nathan Hardman, Director of property law firm McCarthy Durie Lawyers.
The panelists discussed the latest trends in the market, explored the funding options available to property developers and sought to dispel some of the myths around the industry.
Trilogy Funds’ Clinton Arentz told the audience that many aspects of the property market are currently in a state of flux. While property prices are appreciating strongly, construction costs are at an historic high, presenting a new construction landscape for property developers to navigate.
“The strength of the residential owner-occupier market has been quite phenomenal, and we are now seeing more investors coming back as things stabilise,’’ said Clinton.
“And that’s without the benefit of foreign buyers, who will also eventually return.
“So given that backdrop and increasing levels of business and consumer confidence, we foresee an even stronger property market ahead.’’
Non-bank lender Trilogy Funds has over two decades of experience in financing the construction industry, with more than 100 loans currently across Australia’s eastern seaboard ranging from $3 million to $25.5 million.
Clinton said that based on discussions with their clients, it was clear that developers should now be carefully reviewing their building contingencies as costs continue to increase.
“Materials prices are rising, and development sites are thin on the ground and going up in price all the time,’’ he says.
“Valuations for end product are on the move as well, but they’re historically based.
“So, what I would suggest to all developers is that they should be placing more value on the input they get from the expert consultants they work with, in particular in the areas of valuations, legal and cost-based Quantity Surveyor (QS) reporting, as those are the three primary inputs into the work that developers do.’’
Clinton noted that the team has observed an increase in delays relating to securing certifications and approvals over the last 12 months.
“These could be at the front end, for initial approvals such as development applications, but are more likely at the back end such as obtaining sign-offs for final compliance certificates and the like. It’s been quite sticky in some states and it’s causing some substantial delays,’’ said Clinton.
“Experienced developers will work around this. They will plan for it and they’ll have solutions in place before the problems emerge. A prudent developer always allows an abundance of caution.’’
Clinton said the market for development capital was currently very competitive, and Trilogy Funds was offering a leading lending rate of just 6.95%* for construction lending, depending on the nature of the transaction and the level of risk.
“That is ultra-competitive pricing, especially when you consider that we don’t have the same presales requirements or other high hurdles that the major banks are expecting of their developer clients now,’’ said Clinton.
M3Property’s Managing Director Luana Kenny provided the webinar audience with an overview of the essential role that property valuers play in construction funding, and she explained the various valuation models commonly used in the industry, including market value, as-if-complete value, and the project-related site assessment value.
She highlighted some of the key questions valuers will ask when assessing a project, including:
- Are the relevant approvals in place and in time?
- Does the proposed development suit the market?
- Does the developer have experience in this type of project?
- Has a building contract been executed, or a QS cost schedule prepared?
- Have qualified/unconditional presales been achieved with 10% deposit?
- What is the buyer profile, and are prices in line with market evidence?
- What is the risk profile of the project?
“It doesn’t matter who we are preparing a valuation for, our work is driven by the evidence,’’ said Luana. “The value is the value, and the market is the market.’’
Partner at Mitchell Brandtman and Quantity Surveyor Tass Assarapin said that as a construction cost expert, he agreed with Clinton that rising input prices are currently a major challenge for developers.
“I have never seen such a volatile market in terms of construction costs before in my career,’’ said Tass.
“There’s a lack of supply coming in and at the same time a big increase in building activity, and as a result (amongst other factors) we’re seeing up to 20% cost increases in some trades.’’
He mentioned timber, steel, window frames and gyprock as materials that have already seen sharp price increases or were expected to shortly.
“I’ve heard from some developers in the last few weeks that they cannot find steel reinforcement mesh anywhere. Subbies (sub-contractors) are also volatile in a market like this because they’re all busy now.’’
“In such an environment, it is more important than ever to obtain up-to-date construction prices and up-to-date tenders from builders,” he said.
“Some contractors are now bearing a big brunt, particularly those engaged on a lump sum or fixed price contract six months ago, they are really under a bit of pressure in terms of being able to complete a job on budget and on time.’’
A well-prepared construction contract provides clarity regarding contract scope and price, which is essential given the current market environment, said Nathan Hardman, Director, McCarthy Durie Lawyers. This is often forgotten in the rush to get a project underway, he warned.
“We’ve noticed the need for speed is very relevant now, the time frames that we’re working with are getting shorter and shorter,’’ said Nathan.
He said that while the non-bank lending space was very flexible and allowed tailored deals to be put together, it was important to note that the more complicated a deal becomes, the greater the risk of delays.
“The more parties involved in a transaction, the harder or more complex the deal, the longer it takes to get across the line,’’ he said.
“If you don’t have good representation to assist you to navigate the complexities, you may not get a deal done at all, or at the very least it will be protracted and will delay your project.’’
Clinton said that as a construction financier, it was just as important for Trilogy Funds to understand the current market dynamics and respond to them as it was for developers.
“We’re an agile non-bank lender, so we move quickly to understand and adapt to these risk elements,’’ he said.
“As we did when Covid-19 broke out, we assessed the risks and opportunities and worked with our consultants, borrowers and brokers to help our borrowers continue their projects in line with forecasts.
“Today the new frontier is cost escalation, so we and our clients need to be well prepared for that.’’
*Terms and conditions apply.
All figures have been rounded. Past performance is not a reliable indicator of future performance.
This article has been prepared for prospective borrowers and provides information only about Trilogy Funds’ lending services. Trilogy Funds Management Limited (Trilogy Funds) ABN 59 080 383 679 AFSL 261425 is not a licensed credit provider and does not make loans regulated by the National Credit Code. The source of Trilogy Funds’ loans may include managed investments schemes registered with ASIC, as well as other private lending arrangements with high net worth investors. If you would like more details on our investment opportunities, please contact us.