The Australian Prudential Regulation Authority (APRA) has continued to put pressure on the major banks in the region to make certain they comply with Basil III obligations. The banks have reacted to this pressure by dramatically reducing their rate of approval for construction lending. As a result the banks’ marketing to developers is now virtually non-existing which has led to a downsizing of staff in their relationship management departments.
Many construction developers in Australia are experiencing significant problems due to this ever-growing conflict between the APRA and the banks. Developers are finding it increasingly difficult to appease the capital adequacy levels while still improving their shareholding return; which they must do in order to stay competitive in their industry.
In order to fulfill their goals the banks are making it more difficult for developers to obtain funding in some substantial ways. This is true in areas such as reduced gearing levels, higher debt pricing, and precedent requirements. Developers are also still trying to implement quality while looking for alternative funding methods for their projects. In some instances they are being forced to abandon some of their traditional but marginal clientele.
The inherent conflict between the APRA and the banks has resulted in huge changes in the construction industry in Australia. Some developers have adapted quickly while others are beginning to struggle significantly. The developers that have adapted have learned how to re-focus from whom they are getting their funding and also where they source their debt.
For some Australian banks there has been a silver lining in this cloud. They have found ways to overcome their battles with the APRA and are flourishing. Despite the increasing changes in developer funding methods, these financial institutions currently settle more than one transaction each week. It should be noted that the banks’ clientele in these instances have decided they do not want to miss out on great market opportunities just because the banks are having problems. In these cases persistence is the key.
Australian statistics showed that in much of the fiscal year 2015 more than 50% of deals were settled with major banks. However as they headed into the Holiday season at the end of that year over 60% of developers were selecting alternative funding sources. The financial institutions that have survived thus far have been the ones to adjust and offer their own versions of alternative funding programs. These institutions are able to quickly spot the best outcome for their clients’ project needs and help them fulfill those needs. If a particular bank is going to survive this tidal wave brought on by APRA, they too are going to need to adapt.
What is in store for Australian construction financial lending in this coming year? Due to the troubles between APRA and the banks, more private investors are taking up the slack. Those who will survive are the ones that are able to successfully manage the changes in the industry and who also can still spot a great opportunity. Both the banks and the developers will need to remain on their toes in order to continue and to once again flourish in the Australian developing industry.