Aussie curbs on property lending fuel shadow market

Residential properties line the Sydney suburb of Birchgrove in Australia.
Residential properties line the Sydney suburb of Birchgrove in Australia.PHOTO: REUTERS

SYDNEY • Australia's push to control a housing bubble by reining in bank lending to property developers has unleashed a highly profitable market for shadow lenders, including international hedge funds.

The lenders are funding some developers at more than double the interest rate for the same type of loans that banks were providing just a few months earlier, a reflection of how some construction firms have been forced outside the regular banking system to secure financing.

"Effectively, the risk hasn't changed, but the pricing today is about 12 per cent, not the 6 per cent that banks were charging 12 months ago - so you are getting very attractive spreads of almost double in this space," said Mr Martin Scott, the Australian head of Swiss-based investment manager Partners Group.

The lenders are generally attracted to developers with pre-sold apartments in otherwise unfinished projects. There are no figures on the size of this market, but Mr Dan Simmons, a Hong Kong-based partner with hedge fund OCP Asia, which is providing funding, estimates it is worth tens of billions of dollars.

The broader shadow banking market in Australia is about 7 per cent of total financial assets, the country's central bank says.

Australia's home prices doubled in the 12 years to the end of 2016. So last year, Australia's regulators imposed measures that forced banks to take fewer lending risks and made securing mortgages for investors, particularly foreign ones, more difficult.

That caused a sharp pullback in construction lending by mainstream banks and once-rampant buying interest from Chinese flittered away, hitting developers and opening up a funding gap.

Feeling the squeeze from the measures, Australia's only listed developer, McGrath, issued a profit warning last month.

In a global low-rate environment, the likes of Kohlberg Kravis Roberts & Co, Goldman Sachs and Nomura have joined local firms, including Qualitas, Alceon Group and Wingate Group, to lend senior debt to real estate developments, according to market sources.

"All the big PE (private equity) funds are bringing their special-sits (situations) groups in to fill this funding gap, because effectively these are equity-type returns in debt positions," Mr Scott said.

Partners Group secured annual returns of close to 15 per cent by providing senior debt to two pre-sold projects in Brisbane and Melbourne, he added. He declined to identify the projects because they were private. But he said one of them had been unable to secure bank loans because many of its apartments had been pre-sold to Chinese buyers, who are finding it more difficult to take money out of China because of tight capital controls and who face stiff taxes on purchasing new property from the Australian authorities.

Regional hedge funds, such as OCP Asia, are also swooping in. OCP's Mr Simmons said its multibillion-dollar fund had invested over A$600 million (S$613 million) in senior debt in construction projects, securing returns in excess of 15 per cent.

"We are seeing settlements take longer but buyers are definitely coming up with the funds," he said. "We are funding developers that have pre-approved projects with healthy profit margins that only lack a bank to finance them."

He warned that many developers who had not pre-sold their projects would struggle to pay higher funding costs.


A version of this article appeared in the print edition of The Straits Times on December 13, 2017, with the headline 'Aussie curbs on property lending fuel shadow market'. Print Edition | Subscribe