BY KARIN MOWLEM | WEDNESDAY, 31 JULY 2024
Counterparty quality
Wingate has always supported quality developers with strong financial positions, and we continue to see attractive lending opportunities in private property development and construction.
The decision by the major banks to pull back from construction lending has seen a number of top-tier developers turn to the non-bank
sector for funding for the first time. These are groups that have strong track records and stable balance sheets. They offer projects that meet market demand with the support of tier-one consultant teams and builders, and they have demonsrated financial capacity to withstand delays or cost overruns.
Funding sources
Wingate continues to see strong demand from experienced private developers across Australia and has access to a number of funding sources to take advantage of these opportunities. In addition to its ~$1bn flagship fund, Wingate Investment Partners Trust (WIP) and Wingate Property Senior Debt Fund (WPSD), Wingate has established a senior warehouse funding facility with Goldman Sachs, a leading global investment bank, for up to AUD$200m for private construction debt. This facility recognises the unique risk-adjusted opportunity of progressed construction loans in today’s property lending market. Wingate also continues to explore partnerships with institutional capital
partners where appropriate to support funding of its larger investments, such as the $200m commitment secured in February 2024 from a large US investor, which has brought Wingate’s total facilities and funds under management to $7.5 billion across its businesses.
Additionally, last year, Wingate successfully repaid co-investors the sixth in its series of curated first mortgage property portfolios, which have raised over $200m in the past 18 months. he July 2023 first mortgage portfolio offer was secured against two senior debt property developments, with an average loan-to-value (LVR) ratio of 65%. These included a 14-month $45.7 million senior secured construction debt facility for the subdivision and development of 165 residential land lots in Victoria and a nine-month $51.9 million senior secured construction debt facility for the refinance and construction of over 100 townhouses in New South Wales. Both projects had permits in place and were supported by experienced builders. The LVRs on these portfolios reflect our increased conservatism following rate increases by the RBA over the last 24 months.
Market view – construction costs and project sales/revenue/presales
We continue to see pressure on profit margins for developers driven by construction price escalation as a result of supply chain disruptions, labour shortages driven by increased levels of public infrastructure funding, and recent changes to Enterprise Bargaining Agreements (EBA).
This pressure is not anticipated to abate in the near term, and as such, we believe that completed unit or land lot prices will need to increase to ensure that further supply is viable. We are also seeing that it is increasingly difficult to secure presales in the current market.
Despite record-low unemployment, buyers are still unsure about potential further rate rises, tax increases, and construction risk, which are front of mind considering the number of high-profile builder insolvencies that have occurred. This is impacting buyer confidence in both the greenfields and built form off the plan markets. As a result, we have seen the major banks recently reduce their presales requirements – however, only for select borrowers. Wingate will also consider reducing its presales hurdles on select transactions, subject to being comfortable that the resulting residual debt levels on completion are appropriately geared and well-secured to support a refinance on completion and that the supply-demand fundamentals in the location support this position.
Due diligence
Wingate’s due diligence process remains robust, with a strong focus on builder and sponsor financial capacity. With cost escalation set to continue (albeit not at the levels we’ve seen over the past 18 months), it is critical that builders have the ability to withstand potential cost overruns and are not adversely impacted by mispricing of previous projects. As part of its due diligence process, Wingate reviews builder capability, including track record, current workbook, pipeline and resourcing, supported by its in-house construction manager. Where appropriate, certain conditions will be put in place in relation to trade letting to ensure costs are locked in, reducing potential future overruns.
Wingate will also utilise external expertise in conducting builder due diligence by commissioning a third party to review forward cash flows and to take a deeper dive into the work-in-progress and financials. Wingate will then adopt recommendations where appropriate, for example, requiring further capital injections into the business, limiting the number of live projects, or putting in place additional contingencies.
Conclusion
Despite ongoing challenges, we see the fundamentals in the residential sector remaining strong. We are seeing continued high levels of migration, low rental vacancy levels, and very low supply levels. The supply shortfall is driven by reduced land supply in the greenfields as a result of the government’s inability to fund the required infrastructure, construction cost escalation, and difficulty achieving presales. These headwinds are making it difficult for developers to start building in either greenfields or urban built-form environments. This is exacerbated by the lack of focus on future supply through the rezoning of land, with the process taking many years to progress.
Wingate takes a longer-term view and sees opportunities to support high-quality developers building good products in attractive locations to meet the significant undersupply in the market.