Last year will be remembered by many as the “year private lending went mainstream”.
It was a year where:
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Major private lenders wrote record levels of debt
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A significant number of reputable property developers used private debt for the first time
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Multiple major media outlets covered the rapidly growing private debt market in Australia
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Conventional banks demonstrated a lack of activity in property development lending
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Industry bodies estimated the non-bank commercial real estate debt market at $74 billion, or 16 per cent.
As 2023 is farewelled, it’s useful to look at the year ahead and to note anticipated projections held by the team at prominent brokers in the private lending space, aptly named: Private Lending Brokers (PLB).
Exploration and legitimisation
Brett Macartney is director of Private Lending Brokers (PLB) and he’s very confident in his industry projection for 2024, stating: “2020-2023 were years characterised, in our experience, by property developers starting to view private lending as a legitimate alternative to conventional banks. In this period, many considered private debt proposals and may have even flirted with receiving indicative term sheets from private lenders.”
In 2024, it is Macartney’s estimation that private lending will be the year where many developers cross the line into actually settling loans with private lenders. He argues that this will result in a further increase in commercial debt market share for private lenders.
This, Macartney suggests, signals an increase in confidence that property developers have in private lenders, largely on account of:
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Very large and sophisticated private lenders controlling the significant portion of the market (many smaller and less-sophisticated private lenders have been priced-out of the market)
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Multi-billion dollar superannuation funds entering the market
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Developers anecdotally learning of other developers’ experience with private lenders and the benefits so-associated
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A changing apartment purchasing market (defect scandals) that make pre-selling more difficult and thereby increasing the demand for low/no-presale facilities that private lenders offer
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The higher leverage required by Developers to supplement their cash contribution to fund the project. Private lenders offer higher Leverage, effectively reducing the amount of hard-equity required of developers
Liquidity explosion
Nathan Khoury, director at Private Lending Brokers, expects that between 2024-2030 there will be an “explosion” in liquidity in the private lending space. Khoury explains: “The previous decade has seen property developers and private lenders alike giving private lending a go, at a conceptual level.”
However, as Khoury says: “Many private lenders and property developers have now enjoyed pleasant financial and practical outcomes and have experienced a full cycle on developments. Private lenders have been repaid and property developers have completed projects—many with great success. This gives property developers and private lenders the confidence required to further mature this industry.”
As a result of these cycles completing, Nathan anticipates property developers will seek out further private debt, thereby increasing demand.
At the same time, private lenders have come out of project cycles and earned their interest and fees successfully and will be there to accommodate the increased demand with significantly increased supply of private debt.
Private lending fund managers will arguably have an easier time raising further funds to lend out on account of the successful project cycles they’ve been exposed to. Money is notoriously greedy and always chasing elevated returns. Where the returns exist, so too one would expect the funds to flow.
A cautionary tale
The team at Private Lending Brokers explain that, whilst the growth in private debt markets is exciting for the Australian property sector, it also comes with a warning.
As with any expanding market, where there is growth, so too are unscrupulous players found.
This includes “private lenders” that lack sophistication, have little experience and don’t necessarily have the best commercial intentions.
The dangers of linking with the wrong private lender have been explored and shouldn’t be ignored.
It’s best to take caution when dealing with a potential private lender.
Preferred qualities include a reputable group, significant fund size, reliable sources of capital and a proven history of settling.
Using a specialist finance broker that has experience in the industry can help identify such lenders with more ease and efficiency.
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