crest_capital

Discounting pre-sales to meet bank requirements come at an unexpected cost

Fri, 23 Oct 2020 00:24:30 GMT

The opportunity cost of bank finance

The non-bank industry is often ignored when brokers and advisors make funding recommendations to their clients. The cost of capital available to non-bank lenders is substantially higher than the major banks and an assessment on funding costs only will more often than not favour the majors. But what about the opportunity cost?

Crest Capital Asset Management (Crest Capital) has compiled a case study of a transaction that involved one of its clients to illustrate the opportunity cost:

*Table has been adjusted to demonstrate opportunity cost on a $10million development project

The client found that it had to offer discounts/incentives as high as 10% off its retail price to attract off-the-plan purchasers prior to commencement of construction. However once construction started, its discounts reduced to 2.5%.

The table above illustrates the impact of opportunity cost relative to dealing with a non-bank lender in two important aspects:

An early start with construction without 100%+ debt cover as required by the majors reduced the discounting factor with a commensurate increase in profit; and
A higher LVR approach to lending reduced equity required and therefore enhanced the Return on Equity.

Crest Capital has been active in the Perth property market for over a decade and has been dealing with a handful of select partners. It has established a direct presence in Perth and is offering new clients an opportunity to access its funding – contact us today to review your clients’ funding needs.

Crest Capital offers funding for a 12- 24 month term. It is part of a large fund manager and has capacity for loans from $750k to $25 million. In the current environment many borrowers are taking advantage of the following product offerings:

No pre-sales construction funding
Acquisition of development sites
Land development and subdivision funding
Short term loans for acquisition of investment properties
Bridging finance and short-term loan facilities
Funding to effect restructuring and refinancing of portfolios
Mezzanine and preferred equity facilities are selectively available

At Crest Capital our focus is on lending in the Perth metro area and we do not currently lend into regional WA or eastern states jurisdictions.

The biggest opportunity cost in property – missed projects!

Wed, 24 Jun 2020 05:18:34 GMT

Non-Bank Funding Offered to the Finance Broking Network to Fast-Track Projects

Perth is experiencing a mini-boom in certain market segments and locations – most notable the land sales and entry level apartment market. Market participants, such as developers and investors, are scrambling to secure their slice of the opportunities presented by the Federal and State Government stimuli to the construction industry via home and apartment buyer incentives.

The incentives have an expiry date in December 2020 and will likely favour those property players with existing stock on the market or close to market release. Crest Capital Asset Management has released additional funding, now offered to the finance broking network, to help fast-track these projects in time for the December deadline.

Some property developers will miss this unique market opportunity. Admittedly, it’s a short, sharp stimulus and property is a longer-term product - it takes time to conceptualise, acquire, design, obtain planning approvals, raise equity and debt, secure pre-sales and then bring the product to market.

Missed opportunities frequently trigger introspection and sometimes a review of business practices and models. Crest Capital has previously commented on the funding gap in the development finance market caused by bank disintermediation after the GFC (Global Financial Crisis) a decade ago, and the need for smaller developers to reconsider traditional approaches to development finance.

Non-bank lenders have emerged as the new source of development funding to small-and mid-tier developers. This trend is here to stay – in the US and UK non-bank lenders represent a much larger percentage of development funding.

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Trust and Opportunity Cost

The most recurring objections to non-bank lenders by developers are the perceived higher cost of non-bank lenders and their lack of visibility and transparency, essentially a trust and reliability issue:

Do they have the money to lend? Are they lenders, or intermediaries presenting as lenders?
Why are their rates and fees so much more than the banks – it reduces the profit margins substantially?
Lenders secured by a first mortgage exert a lot of power on a project – can they be trusted or will they act in a predatory manner?
How will they behave in a difficult situation often encountered in development projects?

We have a series of case studies that demonstrate to our introducers and clients the true opportunity cost of a non-bank lender at higher rates vs a major bank at lower rates, taking into account the comparative timing of a project and its impact on prices of completed stock vs off-the-plan prices.

This comparison does not even take into account the greatest opportunity cost of all; not being in the market at all…especially in boom times.

The other most prominent fear, a lack of trust in non-bank lenders, is not as easy to dispel. Trust is a currency developed over many interactions and several transactions. At Crest Capital we clearly communicate our values , and prospective clients can do their own due diligence in the market about our ethics and conduct toward our clients. We are fair and remain pragmatic when things don’t go according to plan and will always work with our clients to find a commercial solution together.

We are determined to separate ourselves in the marketplace from predatory financiers.

We would welcome an opportunity to look at a existing or prospective transaction and assist with a funding solution – in doing so we can often demonstrate the biggest opportunity cost to our clients – not being in the market at all because of an inability to secure adequate capital at the right time.

A capital partner in the Perth property development market

Tue, 31 Mar 2020 07:48:09 GMT

Perth Property Development Finance

Development is all about funding, it is a very capital-intensive business, and until the developer has solved its access to the various forms of capital required to fund a project it will remain a concept.

Whilst the development approval system is often regarded as one of the major barriers to housing supply, in reality, the vast majority of potential projects will not get close to the development approval phase because they are either not financially feasible or, if they are, the developer cannot secure the necessary finance to undertake the project.

Non-bank lenders and mortgage funds are proving increasingly popular alternatives in the Perth property development landscape, as well as capital partners such as Crest Capital Asset Management (CCAM), who offer unique project-focused solutions.

The state of development finance

In the period since the global financial crisis regulation and other impediments have diminished credit availability. The biggest impact has been the restrictions placed on the participation of banks and other deposit-taking institutions in development finance.

As a result of this process of bank disintermediation a funding gap has occurred estimated to be in the order of $30 billion a year – this gap is increasingly being filled by non-bank lenders and mortgage funds, but at a higher price point reflective of their business models and higher cost of funding.

A decade after the GFC, regulation continues to inhibit traditional lenders and there are reasons to believe the reduction in the market share of banks in development finance will fall much further still, as fewer developers and fewer projects meet their stringent requirements.

The biggest effect of this funding gap has been felt at the lower end of the development market, developers with projects under $5m as well as land developers.

Development business models in a lower-liquidity landscape

Obtaining bank finance for development used to be much simpler. In the new lending landscape bank funding requires more equity, high pre-sale levels and meeting a raft of onerous credit requirements.

Developers have had to adjust to the scarcity of funding and increased equity requirements. Some have adopted business models that recognised the importance of access to all forms of capital and have incorporated capital raising and its regulatory licensing regime as an intrinsic part of their business model. Others have evolved to taking on larger projects, or, on the other end of the spectrum, scaling down the number of projects they target every year to enable them to preserve sufficient equity for each project.

With the exception of a small minority, developers have had to adjust their business models to accommodate higher funding costs to get projects commenced.

A capital partner for developers

The vast number of developers would still prefer a focus on their core skills – finding good development opportunities and executing on the project.

A capital finance partner such as CCAM uses a project-focused initial assessment. If the project survives the initial review, we will work with the client to attempt a solution of the capital requirements .

Whilst the majority of its funds are advanced as senior debt, CCAM understands that many viable opportunities do not make it off the drawing board – preferring early engagement with prospective clients to help shape the funding outcomes using flexible capital sources.

In this way, developers can stay focused on development and leave the capital stack to an experienced partner.

Contact CCAM today for more in-depth information on property development options available or view Perth property finance case studies here . We welcome any enquiry and will assist with a more detailed feasibility analysis.