Brokers, lenders have duty to write better deals
Non-bank lender Holden Capital Partners (HCP) is celebrating a milestone – seven years since its inception, the Brisbane-based development finance boutique has officially surpassed half a billion dollars in funded loans.
Part of that success can be attributed to the growing influence of the broker channel in this specialised segment of the market.
HCP opened up to the broker channel around three years ago and since then, it has grown to around 10% of HCP’s deal flow. A modest figure, though in a chat with MPA, founding partner Daniel Holden said he is “happy to see more”.
The company is not on an aggregator panel just yet, but “we have entertained the idea and it’s on the cards in the foreseeable future,” Holden said.
It is no secret that brokers have been diversifying their offerings more and more in recent years – clients are demanding it and lenders are encouraging it.
While this is seen as a natural evolution of the broker market, diversification can come with mixed results.
Holden said deals introduced by mortgage brokers “generally need a lot more work” to get them in proper order, whereas deals introduced by more experienced commercial brokers tend to pass the approval process a lot quicker.
According to Holden, more experienced commercial brokers are less inclined to work with a lender operating in the development finance space without assessing their legitimacy.
“They want to see 10 or 12 case studies of deals that we’ve done to get to know us better,” he said. “They’re not going to just spend three minutes on a phone call with us and send us deals, they want to know we’re the real deal and doing the right thing by borrowers before they recommend us to their clients.”
This could be a result of the post-Covid influx of alternative lenders into the development finance space, with varying degrees of quality.
Credit risk increasing
Some lenders new to the space have only focused on the deal's “macro” without fully grasping the necessary checks and balances to distinguish good projects from bad projects, said Holden.
Without naming names, he said these lenders “just want to get the money out the door, they just want to get the loans on their books” without “following the full process that you would normally follow.”
“They’ve rushed in, lent the money and ended up with a bad loan on their books,” said Holden. “It’s a crowded marketplace at the moment and I think there are some lenders that are just approving things to get market share as opposed to it being a sensible loan.”
Holden expects to see a growth of bad loans in the coming year or two “because of some pretty loose credit decisions in the non-bank space.”
“In the last year it’s gotten very competitive and as a result the credit scrutinising has relaxed a lot,” he said, highlighting the uptick in receiver and administrator-appointed sales on the property pages as proof.
“On some occasions you can very clearly point to the fact that they were too loose on their lending… they lent to someone who was doing a project that was too big for them and didn’t have the financial resources or skill set to take that project on,” he said.
Flexibility at a cost
While most of HCP’s deals involve residential developments, the group also backs unique projects like small industrial sites, childcare facilities, service stations, microbreweries, and even a KFC drive-thru.
Many clients turn to HCP after being rejected by the Big Four, seeking more flexible, higher loan-to-value (albeit pricier) deals from non-bank lenders. But rejection isn’t always about creditworthiness.
Holden described a common scenario where a developer does a handful of residential projects with a big bank, at which point the bank reclassifies them as a commercial developer. The developer, therefore, must then tap commercial finance.
Even if the majors are willing to provide this – and often they will not if there are no pre-sales – not all developers can afford a 30% deposit on a $5 million loan.
While this provides opportunities for the likes of HCP, there is an undeniable spectre of credit risk to consider, especially when an LTV is pushing above 80%.
Major banks have vast compliance teams to flag risky borrowers, but how does a boutique like HCP protect itself?
“Track record is very important,” said Holden. A strong track record allows for robust due diligence, which often involves talking with previous business partners to assess their ability to deliver on a project.
A borrower’s balance sheet is also key. “That’s not to say they need three million in cash,” Holden said, but they must be able to access funds if they exhaust their project’s contingency.
Taking on additional risk naturally comes at a cost, and for HCF, their commercial loans can be around two percentage points higher than those on offer by the Big Four.
Holden suggested this additional interest cost can be offset by faster turnaround times – often days compared to weeks – which allows a project to break ground faster and start earning revenue earlier.
With interest rates starting to fall and deal activity expected to kick up a notch, the robustness of brokers and lenders like HCP operating in the development finance space could be stress tested in the months ahead.
