Small private developers thirsty for credit

Small private developers have become the latest victims of the credit squeeze as the secondary financing market dries up.

Alliance Financial Group director Craig Dres said property developments in excess of $5 million are struggling to find finance as the big four banks put more conditions on loans.

“The big four banks now want 60 per cent of the development pre-sold before they will consider giving a loan,” he told Money Management.

“If it is a retail development, the banks will only make a loan to a project in an established shopping area. The banks are only looking for A-grade developments.”

Small private developers have traditionally sourced funding from secondary banks and mortgage trusts.

Dres said these sources have completely stopped lending and even when a developer had a funding agreement with a major bank, the banks have been coming back to renegotiate the terms.

He said small private developers who could not get funding for proposed developments were regularly approaching Alliance.

“In the last week we have had more than 10 enquiries from small, family-run development companies seeking funding for projects they have in the pipeline [which are] struggling with the banks for finance,” Dres said.

Dres admitted it would be tough for small developers in 2009, as the big four banks now control the funding market. He predicted that as the economic situation worsens in the New Year, the banks would cut rates to 6 per cent by March, although the business rate would stay at 8 per cent.

“The bigger mortgage brokers will be able to negotiate rates with the banks if they have the volume of loan business,” he said.

The higher rates are also affecting small private property investors, who are choosing to leave their money in cash accounts.

“With levels of funding dropping and capital values falling, they prefer to leave their money in the bank,” Dres said.

“Even with cash giving a 5 per cent return, they see this as more attractive than buying more properties.”

While top investments still attract some sales, investors are looking carefully at yields.

“Small investors will be looking at rents in these properties, so it is time to strike agreements with tenants to ensure there is a good income for the property,” he said.