Financing the next wave of residential development

Capital markets have been keen to gain exposure to the residential development sector after a difficult 12-month period, and the flow of capital through traditional and new channels has made for a strong borrowing market.

“If developers are not seeing a substantial improvement in the terms of which they can access capital, then they need to reconsider how they are accessing the market,” says Danny Kent, Director at Ocian.

Reduced supply over the past 24 months along with low-interest rates and improving borrowing environment for both owner-occupiers and investors has led to strong bounce back across residential property markets.

“Strong market fundamentals have attracted new sources of capital to the sector with all forms of real estate investment providing good risk-adjusted returns compared to other investment classes. We have seen a surge in the capacity of existing financiers, and a number of new financiers coming into the market. When combined with a reduction in the number of large-scale projects to take up that additional liquidity, we have moved into a borrower’s market. However, a strategic approach is still needed to ensure you are getting a market-leading result,” adds Kent.

Across Australia, constant lockdowns meant a shift of living and working out of the home. This means having additional space is a godsend. The experience of remote working has also led many to reconsider the importance of being located close to major CBDs. Residential developers are responding to shifts in demand driven by the pandemic.

What Ocian has observed over the past 12 months are four key areas of opportunity for residential developers driven by the broader changes resulting from COVID:

• High-end boutique apartments providing great options for cashed-up downsizers
• More affordable medium density housing options within an established suburb where changes in planning rules have created new opportunities
• Development of land for new homes in release areas and growth corridors of our major cities capitalising on government support for first home buyers
• The surge in regional migration meeting new demand in regional centres and lifestyle locations

Each of these four areas presents its unique challenges when seeking finance. The key to success is an understanding of what is being achieved in the market, knowing the appetite and capacity of the different market participants, having a considered and well-prepared information package for potential financiers, and driving a tight competitive process across a broad range of alternate financiers.