Access to finance for construction projects in Australia and New Zealand is severely limited following the global financial crisis and neither developers nor financiers expect the situation to improve for at least 18 months, according to research by international property and construction consultants Davis Langdon.

Davis Langdon surveyed developers and financiers from Australia and New Zealand, identifying key barriers and possible measures to alleviate credit constraints in the industry.

Although opinions are mixed regarding when credit restrictions will ease, developers and financiers are certain there will be no change during 2010. Nearly 60% of financiers expect the situation to turnaround in 12 to18 months while most developers have a more pessimistic outlook and are expecting to wait 18 to 24 months.

However, New Zealanders have a more positive outlook with a majority expecting a better finance situation in 12 to 18 months, whereas most Australian respondents are expecting to wait over two years. This may indicate that New Zealanders seeking finance from Australian banks could be faced with protracted credit constraints.

Davis Langdon’s Australia and New Zealand Research Manager, Michael Skelton, said developers and financiers had differing perspectives on the underlying cause of the access to finance problem.

“Developers viewed the loan to equity ratios as very conservative and unworkable, particularly when combined with shrinking valuations and a lack of second tier finance,” he said. “The finance sector expects a turnaround when global markets are less skittish.

“While developers expressed a willingness to go beyond traditional sources of funding, it remains to be seen whether second tier financing will re-emerge with enough strength, enabling greater competition in local funding markets and reduced borrowing costs.

“Many of the developers and financiers surveyed identified the same barriers to finance but financiers were more focused on levels of pre-sales and the risk profile of the sector while developers cited the loan to equity ratio as their number one obstacle.

"There was some common ground between participants from Australia and New Zealand on the barriers to finance.

“Both agreed on the importance of pre-sales, but more Australian respondents saw the risk profile of the sector as a greater factor than New Zealand participants.

“Instead, 49% of New Zealand respondents saw the risk profile of particular projects as a more significant consideration in obtaining funds.”

Australia and New Zealand also shared some common ground in their views on which sectors were harder to finance.

“However, New Zealand is having greater difficulty in the residential sector, whereas the increased demand and Government stimulus measures in Australia’s residential market has helped make these projects more appealing to banks,” said Mr Skelton.

“A move by banks to limit their exposure to the property and construction sector was identified as another obstacle faced by the industry.

“Not surprisingly, the increased risk of construction and development loans – which are inherently more prone to fail in a downturn than secured loans due to the potential for construction lags – meant they were less likely to obtain funding than an existing cash flow property asset.

“This perceived risk seemed to override any previous relationship between the bank and client.

“As one New Zealand developer lamented, past success and proven abilities seemed to count for little.”

Another issue raised by those surveyed was a lack of second tier and mezzanine finance.

“This has created a situation where large developers and real estate investment trusts that were able to raise extra capital during 2009/10 are positioned to meet equity requirements and continue ‘business-as-usual’ while small and mid-sized developers unable to raise funds have limited or no option of raising capital,” said Mr Skelton.

“A new mechanism to bridge [the] equity gap needs to be found.”

Mr Skelton said looking ahead for finance, developers indicated that they would consider moving away from domestic bank funding.

“Their intentions for future financing show a shift towards private syndicates, domestic private equity and offshore private equity,” he said.

“The top target sectors remain the same, but there was a considerable rise in the number of developers who expressed an interest in pursuing residential projects. Interest in the industrial and office sectors remained relatively positive compared to other sectors, as did interest in aged care projects.”

Mr Skelton said the survey showed there were still a lot of challenges ahead for the property and construction sector. The abundant levels of credit for construction projects secured in the past decade would not return in the near term.

Davis Langdon will continue to measure developer and financier views towards access to finance in their on-going quarterly construction sentiment survey.

For further information, contact Meaghan Jones on +61 3 9933 8800 or email mjones2@davislangdon.com.au 

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