This article is from the Australian Property Journal archive
AGAINST challenging market conditions, developers are taking on higher levels of debt to fund projects with private credit filling equity gaps.
According to the inaugural Centuria Bass Australian Property Development and Finance Index 2024, which surveyed 67 developers, investors, fund managers and brokers, 75% of all respondents saw their average loan size increase over the last five years to $10-$20 million.
Rising loan sizes over the period, reflects the current markets high construction interest costs.
The average Centuria Bass loan size has more than tripled from $8.35 million in 2019 to $30.7 million in 2024, with the majority of these loans in made up of residential housing projects.
“In the past three years, a number of projects have stalled, which means developers have increased their leverage to cover higher than anticipated costs. Subsequently, many developers are now facing severe constraints, further delaying project commencements. In short, they are left with a missing piece in the capital stack,” said Nick Goh, joint CEO at Centuria Bass.
“For many projects to advance, we need to see stability in construction costs and sales prices need to increase to support the levels of bank debt funding required. Without these factors, developers need to find some equity.”
Current estimates show FY25’s expected annual commencement figures falling nearly 160,000 starts short of the numbers needed to meet the government’s increasingly unrealistic goals set out in the National Housing Accord, despite a 4.4% boost in September and a more optimistic outlook for FY26.
With Australia recording its worst 12 months for new home builds in a decade, according to official data.
No matter the funding, developers face the uphill battle of Australia’s ongoing skilled labour shortage, with the country short some 90,000 extra tradies to meet the demands of the Housing Accord.
Across the Centuria Bass portfolio, the lowest price quartile has seen sales momentum, led by house and land packages valued up to $850,000.
“Alternatively, private lenders have the flexibility to take a higher risk position, providing a higher loan to value ratio by taking a view on improving market conditions in the future. This is where private lenders provide more flexibility,” added Goh.
“From discussions with our developer clients private credit is enabling developers to pass a tipping point with funding solutions to fill these equity gaps, which enables more sites to be acquired for impending project starts. Private lending is becoming a critical piece in enabling greater supply of residential housing construction.”
The survey also found that 69% of projects respondents are involved in currently have multiple lenders, reflecting financial risk management.
While 75% said they or their clients are planning to restructure or refinance their debt portfolio over the next year.
Over the past two years, construction finance for land sub-division project loan types has seen the greatest level of demand, though demand is also growing for bridging and residual stock loans.
“A lot of developers seem to be getting prepared for the cycle to turn and the recent international rate cuts could be the trigger,” said Charlie Robertson, managing director and head of origination at Centuria Bass.
“We expect demand for new homes to remain positive over the next few years because of the current significant undersupply of properties, government initiatives to alleviate the housing crisis and easing interest rates.”
With house price growth and inflation softening, 2025 could see a much anticipated interest rate cut in March, according to Domain, after a long cycle of hikes and now holding.
