Property investors, developers turn to private credit
Developers, investors, fund managers and brokers have turned from traditional banks to private credit to fund their mid-market property portfolios over the last five years, a new report showed.
In their inaugural report titled Australian Property Development and Finance Index 2024, Centuria Bass Credit surveyed over 60 mid-market developers, investors, fund managers and brokers on their investment loan habits.
The research revealed that 70 per cent of respondents had increased their level of private credit for the past five years, with 72 per cent of surveyed revealing that their loans are now sourced through private credit.
The respondents said that the switch from traditional banks to non-banks was due to the opportunity to take on higher loan-to-value ratios and speed up the decision-making process.
According to Centuria Bass joint CEO Nick Goh, property investors have started to shift to private credit over the last decade but the pace has picked up recently.
“There’ll always be a place for banks at the lower risk end of the market where you’ve got well-capitalised developers who are operating with fairly conservative gearing,” Goh said.
“The banks will always support those borrowers, but that sector represents only a component of the industry, which is presently less active.”
According to the Australian Bureau of Statistics, the value of new investor loans fell 1 per cent to $11.6 billion in November 2024, which is 29.5 per cent higher than September 2023.
Goh said that borrowers who turned to non-banks are taking advantage of the flexibility and the higher risks taken by lenders to start their construction projects.
Seventy-eight per cent of those surveyed mentioned it has become harder to borrow from traditional banks, with some pointing out a growing risk aversion among major banks to fund projects – this opposes the 19 per cent who said there has been no change.
“This is a continuation of a trend in the development finance market that started in Australia, at least, post the GFC,” Goh said.
The data showed that 95 per cent of respondents agreed that the higher cost of non-bank lending is offset by the advantages, thanks to faster decision-making, higher loan-to-value ratios and more flexible terms.
Head of capital at Bathla Group, David Stone, said all its funding is now provided by non-banks due to the deterrent time it can take to get loan approval from banks.
He said a long gestation period for an application means that credit parameters can change and investors might have to provide additional equity into a project or be subject to onerous conditions.
“Our business is predicated on speed. The speed we can get approval, the speed we can start construction, and the speed we can complete projects and sell stock,” Stone said.
“For us, private credit is just so much faster and so much more flexible. Private Credit also allows you to lever a little higher. For those reasons, it makes sense.”