Gary Connolly, head of investments at HoldenCAPITAL Partners discusses how sophisticated investors can benefit from the gap left by the major banks significant level of retraction.
The shift in the development sector from bank to non-bank funding has predominantly been driven by regulatory changes designed to limit the banks being overexposed to high-risk property transactions, particularly in the event of an economic downturn where the governments risk of having to bail the banks out under their guarantees becomes a very real financial, as well as political risk.
These regulatory changes, largely derived from the Basel International Banking accords, reflect the banking restrictions agreed amongst almost all of the world’s major governments as a means of ensuring economic stability.
While they are subject to set timeframes, they are in effect continually updated with further agreed requirements regularly implemented as a means of ensuring that changes in the markets do not disrupt the intent of these measures.
The good news for developers is that a range of non-bank funding options continue to emerge to meet their demands and help to fill the gap left by the major banks.
Related reading: 2018 Development funding: The landscape continues to evolve
These options range from institutional lenders, family offices and other private lending groups including an array of mortgage trusts.
HoldenCAPITAL Partners (HCP) provides one such non-bank funding solution via its private investors.
HCP has the ability to get involved in all stages of the project life cycle, right from the beginning by helping to settle the site, the whole range of solutions in the capital stack during construction and then through to a developer needing a residual stock loan on completion.
While the press often publishes a lot of negative comments around the development industry, the reality is that at various levels and in varying locations, there is always development taking place and the key for developers is being able to tap into the right opportunities.
Equally, investors are always looking for sound investments and property has always provided an attractive but potentially risky alternative to the stock market and more passive options.
Through its association with the HoldenCAPITAL brokerage group, HCP typically works with privately owned and operated entrepreneurial developers who often have multiple projects in various stages of the development cycle across their portfolio.
HCP provides qualified sophisticated investors with the opportunity to access the attractive returns available from investing in these development loan and equity opportunities.
Each select loan investment is outlined via an information memorandum to registered HCP investors providing detailed information including, but obviously not limited to:
- The duration of the loan
- The interest rate offered
- The sponsor profile
- Type of loan and security
- The location of the project
- How the funds will be utilised
The investment opportunities HCP presents to its registered investors generally fall into three risk/reward structures.
First mortgages – Usually a site loan or residual stock loan with a typical loan to value ratio (LVR) of 60 per cent. The forecast net returns for our investors in these facilities are generally 9-11 per cent pa^ over 6-12 month terms.
Second mortgages - Usually fully drawn construction loans with a typical LVR of 75 per cent. The forecast net returns for our investors are generally between 16-22 per cent pa^ over 12-18 month terms depending on the risk profile of the transaction.
Preferred Equity – These opportunities are predominantly construction loans and either:
a) Are loans which have second mortgage loan characteristics i.e. 75-85 per cent LCR although in some instances they are unsecured depending on the requirements of the first mortgagee, or
b) Represent a true equity position in the capital stack providing funding up to 90 per cent LCR or a 75 per cent LVR. The forecast net returns for our investors in these transactions are generally 24-30 per cent pa^ over 7-18 month terms.
Related reading: Sydney: It's hot in the city, but there are still opportunities to be had
The attraction of HCP’s investment opportunities is the fact that we don’t operate as a pooled fund where we make decisions for investors.
Each select loan investment is standalone, and our investors decide which transactions to participate in based on their risk appetite.
The first step for interested investors is to register their interest on the HCP website and they will then receive their registration documentation.
Once this process is completed they will start receiving investment opportunities for their consideration.