Major lenders, particularly the big four banks, significantly reduced their lending in 2018 and 2019. This vacuum has created the opportunity for smaller lenders to step in and fill the gap. One group which has been significantly affected by stricter lending is property developers, and so the LPE Fund specifically provides loans to property developers to fill this void and capitalise on vacant market share by funding property developments.
To understand why property developers are an excellent audience to target, we need to spend some time explaining the corporate finance that is involved in running a property development.
A property development project requires a large amount of capital, usually in two phases. The first phase of capital is to fund the acquisition of the development site. The second phase of capital is to fund the construction of the new properties.
In order to fully fund a property development project, a developer will need to obtain funding from at least two sources – one for each phase of funding. Property developers can reduce the amount of external funding required by utilising their own working capital, but this places a significant cash flow burden on the developer, so this amount is generally kept as low as possible.
A common funding strategy used by property developers is to raise capital from investors to fund land acquisition, and later, take out a construction loan to fund the construction phase.
Many property developers seeking construction loans in 2018 and 2019 found that their loan requests were being rejected by the big banks, or the loans had such low LVRs that they were unable to acquire or raise the remaining amount.
We know this is true, because it happened to Lion Property Group, one of Lion Private Equity’s related companies.
Property developers are excellent borrowers for several reasons. Firstly, as mentioned earlier, they require large amounts of capital to fund their projects. The more capital the LPE Fund is able to lend, the more interest it generates.
Secondly, property developers are able to offer a valuable tangible asset as collateral: the development site itself. This means that any loaned capital is secured which reduces the risk of capital loss.
Lending to property developers and funding property developments is an excellent opportunity; there is strong market demand which is currently in a vacuum, and property developers are secure borrowers.