THE BLACK MASK SCHOOL OF DETECTIVE FICTION AND THE HARD-BOILED NOVEL

Development is risky, and expensive. A developer places a considerable investment of financial resources at risk. Therefore gaining access to funding is critical for

developers, and for development to occur. Due to the risk involved, gaining access to development finance is traditionally problematic.

In the past, most developers were local businesses who would raise money for a project by applying to a lending institution, typically a bank (Logan 1993). These still make up the majority of smaller developers. Any application for funding is assessed against the potential range of risks it poses to the lender, including contractor risk, site risks, planning risks, borrower risk (e.g. track record and management capacity), and market risk (Coiacetto 2012, 56-7). If successful, the developer obtained a loan for a specific project, such as land acquisition or construction. The loan was generally short-term, the interest rate included a margin for perceived risk, and was subject to

conditions such as site inspections and progress reports.

Since the 1990s, numerous additional sources of funding exist, but change regularly, as they are influenced by changes in the economy and other factors. In 2007, prior to the GFC, the market was dominated by the four major Australian banks (e.g. Westpac, ANZ, Commonwealth Bank and National Australia Bank), followed by regional

Australian banks and foreign banks, mortgagee trusts and other sources of finance (Ashe Morgan Winthrop, 2011). Other sources of finance included insurance companies, superannuation funds, internal funding, property companies, the construction industry, government, not for profit organisations, private individuals, international private equity funders, and securitization.

Since the GFC had a significant impact on the sources of development finance. The financing market underwent a number of changes in both the source of the funding (e.g. banks, insurance companies, etc.) and in the form of the funding (e.g. mezzanine and equity funding) (Bryant, 2012). The number of funding institutions has been significantly reduced post GFC (from approximately 40 to just three or four major

76 The capacities of private developers in urban climate change adaptation lenders) (Bryant, 2012). So risky was property development finance that a medium sized bank, highly active in development lending, almost went bankrupt, before the Federal Government intervened (FI2, Financier).

An additional consequence of the GFC was that conditions under which developers can gain funding have become much more restrictive (Ashe Morgan Winthorp 2011;

Bryant 2012). Lending institutions have again become extremely conservative and risk averse, particularly about high risk lending, such as for property development.

Therefore, the process of development funding has to some extent, reverted back to pre-1990s, with ‘traditional’ developers sourcing funding from major banks, with multiple conditions attached to the loan.

Table 5, adapted from Bryant (2012; and Ashe Morgan Winthrop, 2011) outlines how key lending criteria (i.e. developer, sector, location and gearing) were modified during and post GFC for development in Queensland Australia.

Table 5 Changes in key lending criteria post GFC (Adapted from Bryant 2012 and Ashe Morgan Winthrop, 2011) Developer Almost anyone Only very

experienced

Experienced Development Type All, some lenders

specialised in certain sectors

Mostly residential Mostly residential until recently, now some commercial Location All Queensland Major centres or

SEQ only

The results of Bryant’s analysis demonstrate the following post GFC trends: (1) major lenders favour lending money for residential development projects as opposed to commercial and industrial projects; (2) lending institutions favour prime metropolitan locations over regional locations;(3) gearing and presale conditions have become tougher and developers are required to have >25% equity, generally using the land as security;(4) the size of the deals in terms of monetary value have declined; and (5) lending fees have increased (Bryant 2012).

In this study, the majority of smaller developers obtained funding from the major banks, but there was a significant diversity of funding sources. Notable differences between the size of developers and consultants and funding sources were apparent. For

example, only medium and large developers noted cash as a funding source, whereas smaller builders and consultants apparently obtained funding from many sources.

Developers also accessed a diverse range of other funding sources, such as minor banks, high net worth business partners, family trusts, private equity, government grants, NGOs and Superannuation funds (Figure 16).

The capacities of private developers in urban climate change adaptation 77 Figure 15 Sources of Funding for Survey Respondents

Since the GFC, banks have imposed more onerous conditions on development funding. Only if a developer had a good relationship with their bank, and ample equity and capital, then would the bank consider lending them money. Typical conditions included: lower LVRs; a higher percentage of security for the loan; and the requirement for a minimum of 75% - 80% (and in some cases, 100%) of pre-sales.

As a developer said: “Banks say they are lending again, but they have pretty high requirements, especially in pre-sales; want 100% debt cover in the form of pre-sales” (SD1, Small Developer).

This concurs with Ratcliffe et al. (2009, p.430) where the key factors that determine the source of finance are: (1) ‘the status of the developer’, and (2) ‘the degree of risk attached to the proposed project’. Since the GFC, banks have weighted the degree of risk to a much greater extent; developers and consultants were almost unanimous in highlighting an extreme shortage of funding, and felt that obtaining bank finance was one of the biggest hurdles for developers.

Banks were also unwilling to take any planning risk, and refused to finance

developments if planning approvals are not already in place. Further, banks were not willing to fund certain areas, as there was seen to be no demand; i.e. high risk

apartment buildings on the Gold Coast, where there was a major oversupply of stock.

Because of the difficulty in obtaining bank finance, some developers reported accessing private equity funds from overseas; or attempting to do so. Mezzanine finance was available, but it was significantly more expensive than bank finance.

“Overseas finance means investors from overseas who have big

bundles of money and they want to park it somewhere. Australia is very politically stable and a good place to put their money. Almost no bank finance. They are just not lending” (CS4, Consultant).

78 The capacities of private developers in urban climate change adaptation Not all developers were reliant on bank finance. Large publicly listed developers or consultants funded their projects from different sections of their business. For example these used more secure businesses (i.e. a commercial property leased to long term tenants) to fund riskier businesses (i.e. residential development). Consultants were largely funded for providing consultancy services to developers and government. Other developers obtained finance from high net worth business partners, or other private equity sources. No participants obtained funding from superannuation funds or charity/NGOs.

Allied to the problem of obtaining bank finance, were issues with property valuation.

Valuers often collaborated with banks, so were viewed as working against a

developer’s best interests. Some said that valuers were undervaluing properties due to lack of market demand, and at amounts they knew banks would recoup if there were a

“fire sale”.