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Matthew Royal #$%&$'()*+,-,./+*01$+ !"#"$%&'"()*+,(-(."*/-0)("01 "
Summary - Last 12-18 Months The Australian Banks reduced appetite for Construction Finance has been well publicised. The are several contributing factors for this and they include: ! A fundamental decline is presale sales rates. ! Heightened settlement risk and concern pertaining to the Banks existing exposures created by amongst other things the Banks own Retail Banking Divisions being forced by APRA to limit rate of residentially secured credit growth to 10% pa. ! Heightened settlement risk due to valuation write downs of up 30% of purchase price. ! A lack of funding for FIRB purchasers. 2
Summary - Last 12-18 Months cont. ! From a perspective of return on equity, development finance is not as attractive/profitable when compared to other financing opportunities such as lending to going concern businesses which have sound maintainable earnings with high transaction volumes. ! The short to medium term fundamentals has declined in the markets where construction finance approvals have been historically high in recent years. 3
Resulting Practical Effects ! More stringent credit risk assessment especially with respect to new to bank Clients ! Reduction of loan to value ratios reduced from 80% TDC to 65%-70% for construction finance. ! Land bank facility approvals are exceedingly difficult to obtain any LVR. ! Increased presale levels from 50% to as high as 130% debt cover ! Increased complexity with respect to credit assessment and approvals ! Slower approval and settlement timeframes 4
Resulting Practical Effects cont. ! Increased financing costs due to increases in Loan Establishment Fees, Margin and Line Fees. ! Facility Limit approvals greater than $20m are becoming increasingly more difficult to obtain. ! FIRB presales are non qualifying ! Heavier reliance upon the strength of the Developers Net Worth vs TDC ! Presales are taking longer to settle ! Developers holding higher levels of stock on completion 5
Resulting Practical Effects cont. ! Developers are increasingly financing working capital via residual stock facilities. ! An increase in number of non bank lenders have entered into our debt market. ! A long period of competitive construction tenders and escalating construction costs has resulted in several small to mid tier builders going bust. We expect more builders won’t make it out of this cycle. 6
Implications For The Year Ahead Opportunities ! Adapt and Innovate your financing strategies at both a group level and at an individual project level ! Opportunistic acquisitions ! Reduction in construction starts will decrease competitive supply levels ! Increased levels of Non Bank Capital Challenges ! Increased cost of sales ! Increased cost of capital ! Declining values of committed sites ! Declining presale rates ! APRA will pressure Banks not to accept subordinated debt ! APRA will pressure Banks to not accept project site related valuations 7
H1 Title 9'+(/(:,;<=(>,/(1$,+*=</1? Case Study 8
Scenario 1 ! Client required us to finance the acquisition of the land via company share sale agreement and finance the construction costs associated the development of thirty eight (38) residential apartments located in Northern Brisbane. !@ !@
Financing Challenges DFP were retained to provide advice and recommendations on the following: ! Developers had no development experience. ! Developers price list was well below market rates. ! Valuation came in significantly lower than land purchase price. ! No presales at land settlement. ! Client has insufficient equity to finance the development. ! Local apartment market in oversupply. ! Builder was forced to renegotiate construction contract due to cost escalation. !! !!
DFP Funding Table +2(3,(4*5-6$" 7%8)*9:2,); <-1=*9:2,); /20.=-1" >"(3%0* +,(-(." ?"@@-(,(" 7"(,%0 5%)-$ A-(3 BCDDEFEEE A!B""4B@@@ A"B64@B@@@ A44@B@@@ A864B@@@ A@ A"B"@@B@@@ A-(3*50-(1-.),%(*<%1)1 A67B46" A@ A@ A@ A67B46" <%(1)02.),%(* <%1)1 A@ A5@"B@@@ A@ A374B@@@ A6B5!2B@@@ A7C6@@B@@@ <%(12$)-() G*/?*8""1 A@ A@ A@ A3@4B337 A3@4B337 7)-)2)%0;*8""1 A@ A@ A@ A867B"!7 A867B"!7 /0%H".)*<%(),(4"(.; A@ A@ A@ A324B@@@ A324B@@@ A-(3*I%$3,(4*<%1)1 A@ A@ A@ A27B@@@ A27B@@@ ?,1."$$-("%21 A@ A2"8B754 A@ A@ A"76B3"! A5!6B"75 +,(-(."*<=-04"1 A@ A@ A!63B@@@ A!4"B3@@ A2"5B3@@ J()"0"1) A@ A5!@B@@@ A242B73" A852B73" 5K5LA*<K757 BCMNOFMPQ CPFODRFQRD CDDEFEEE CPFPMMFEEE COEFPRSFSPT COMFNMPFNRR !" !"
Results DFP’s recommendations were adopted by the client and DFP were retained to implement those recommendations which has resulted in the following outcomes: ! DFP raised the required capital to settle the share agreement which effectively settled the Land. ! DFP negotiated a vendor finance facility. ! DFP advised, arranged and settled a construction finance from a Retail Bank on favourable terms. ! DFP advised, arranged and settled a mezzanine finance facility to fund the equity gap. ! DFP negotiated a significant reduction to the Builders Construction Cost Escalation based upon unconditional finance offers. ! DFP advised upon a 5% increase in the sale prices of the 38 apartments. ! 25 Apartments were achieved on the increased sale ! Construction is underway !2 !2
Summary of Financial Results Achieved: ! Senior Debt: 60% of GRV and 73% of TDC ! Mezz: 73% GRV and 85% TDC ! Vendor Finance: 90% of TDC ! Development Profit Margin - 22% at Land Value $2,200,000 net project profit vs forecasted loss of $750,000 ! Return on Investment 115% !3 !3
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Summary of financial results achieved: Top 4 Construction Finance Tips !6 !6
Top 4 Tips Focus on the overall cost of your capital both within S/0+$,S=(=:*,E*11<*O*(1, Take Control of Finance Think in the 4 th Dimension individual projects and T/>R Be your own Banker! more importantly across your group +2(3,(4*5-6$" 7%8)*9:2,); <-1=*9:2,); /20.=-1" >"(3%0* +,(-(." ?"@@-(,(" 7"(,%0 5%)-$ A-(3 BCDDEFEEE A!B""4B@@@ A"B64@B@@@ A44@B@@@ A864B@@@ A@ A"B"@@B@@@ A-(3*50-(1-.),%(*<%1)1 A67B46" A@ A@ A@ A67B46" <%(1)02.),%(* <%1)1 A@ A5@"B@@@ A@ A374B@@@ A6B5!2B@@@ A7C6@@B@@@ <%(12$)-() G*/?*8""1 A@ A@ A@ A3@4B337 A3@4B337 7)-)2)%0;*8""1 A@ A@ A@ A867B"!7 A867B"!7 /0%H".)*<%(),(4"(.; A@ A@ A@ A324B@@@ A324B@@@ A-(3*I%$3,(4*<%1)1 A@ A@ A@ A27B@@@ A27B@@@ ?,1."$$-("%21 A@ A2"8B754 A@ A@ A"76B3"! A5!6B"75 +,(-(."*<=-04"1 A@ A@ A!63B@@@ A!4"B3@@ A2"5B3@@ J()"0"1) A@ A5!@B@@@ A242B73" A852B73" 5K5LA*<K757 BCMNOFMPQ CPFODRFQRD CDDEFEEE CPFPMMFEEE COEFPRSFSPT COMFNMPFNRR !7 !7
Kerry Shambly Q)K/>$+?,D$=+),=(),#=;/1=<,S=(=:*O*(1 !"#"$%&'"()*+,(-(."*/-0)("01 !8 !8
Implications For The Year Ahead Opportunities ! Adapt and Innovate your financing strategies at both a group level and at an individual project level. "@ "@
Financing Strategies Traditional Sources of Capital ! Bank Senior Debt ! Mezzanine ! Equity Sources of Capital Emerging ! Institutional capital ! Joint venture with Fund Manager (APN Steller Development Fund) ! Quasi Equity – mezzanine and sub-ordinated debt ! Investment Bond issue (corporate and individual project level) ! Hedge funds "! "!
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