Influx of lenders into specialist area cause for concern
Morgan Owen (pictured) is a rarity in the broker space. In fact, Owen can only think of a handful of brokers like her.
Through her brokerage Penny Finance, the vast majority of Owen’s work is in the specialised field of development finance.
Owen first got into development finance around three years ago, when she was introduced to a client that was buying a “fairly large” ($22 million to be precise) office building in Camberwell.
Owen said the deal came across her desk due to her “figure it out” reputation. Having evidently done a good job on that deal, Owen’s career took a sharp turn down the development finance rabbit hole – and she’s one of the few leading brokers in the space today.
It was a serendipitous time to become a development finance expert, as the country was emerging from the pandemic, bringing with it a backlog of projects that needed to break ground.
While the subsequent funding squeeze was unwelcome, Penny Finance remains a go-to brokerage for complex development finance deals.
Unfortunately, Owen has witnessed a few unfortunate trends in the sector she calls home.
Bad lending practices
Post-Covid, there has been “a massive influx” of lenders into the development finance market, “and I think it's a massive problem, because there are that many loan sharks out there that we do need to be concerned about,” she said.
Owen said the influx is primarily down to the restrictive lending policies of the major banks, which require larger deposits with less flexible terms, leading developers to seek finance elsewhere.
“If it can be a bank deal, it's going to be a bank deal,” Owen said of her preferred funding partners – Westpac got a particular shout out.
“It's obviously the most safe and secure way to go about it, it's going to be a low LVR, it's going to be the best rate,” she said of dealing with the traditional banks.
However, this safety and cost-effectiveness comes at the expense of flexibility, meaning not all borrowers will be able to get what they need from a major bank.
In these instances, Owen will search for a deal at one of the growing number of challengers and non-bank lenders in the space, who will offer higher LVRs and more flexible loan terms, but at a higher interest rate.
But Owen said she has seen some “disgusting behaviour” from the non-bank lenders “that will just say yes to anything and caveat everything.” Often, borrowers do not know what they are getting themselves into with these alternative lenders, which could end up hitting them where it hurts when push comes to shove.
Issues arise when lenders are writing loans with skinnier and skinnier margins – sometimes up to 80% of gross realised value of a project. Combining that with an inexperienced developer is a recipe for disaster, said Owen.
There is blame to be shared across the whole deal flow, with Owen pointing out that it’s a broker’s duty to not put their client into an inappropriate loan.
Banks more trustworthy
Unscrupulous practices evidently come in many shapes and sizes. Owen has seen instances of lenders changing the goal posts mid-negotiation that have made a deal “so inflexible and so bad that we couldn't actually proceed with it.” Yet Owen has witnessed these lenders refuse to refund a five-figure due diligence charge.
Owen has also seen a lender pull out of providing construction finance after settling the land acquisition. “That would never happen in bank land, where, if you get an approval, the bank is going to make good on it,” she said.
While these situations are hopefully the exception to the rule, they are undoubtedly a concern for Owen.
There is a risk of bad loans rising as more and more lenders pile into the space, “especially if people aren’t using a broker,” said Owen. “I would love to see more regulation, to be honest,” she added.
