Two recent calls, first with a $100bn offshore asset manager and then a $500m domestic lender, confirmed my suspicions. The old order of debt risk management is being replaced at the edges.

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New capital is pouring into Australia, and domestic lenders are responding to defend market share. This is symptomatic of the 𝘄𝗲𝗶𝗴𝗵𝘁 𝗼𝗳 𝗺𝗼𝗻𝗲𝘆 challenge in Australian private credit, particularly construction loans.

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𝗔𝗴𝗴𝗿𝗲𝘀𝘀𝗶𝘃𝗲 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀 𝘃𝗶𝗿𝘁𝘂𝗮𝗹𝗹𝘆 𝘂𝗻𝗸𝗻𝗼𝘄𝗻 𝗶𝗻 𝗔𝘂𝘀𝘁𝗿𝗮𝗹𝗶𝗮 are appearing, that I have triangulated with multiple lenders and developer clients.

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𝗢𝗹𝗱 𝘄𝗼𝗿𝗹𝗱 𝗿𝘂𝗹𝗲𝘀 𝗼𝗳 𝗰𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻 𝗿𝗶𝘀𝗸
Since the 2008 GFC, three fundamentals have anchored construction risk:

 

 1. Cost to complete
 Developer contributes enough equity upfront so debt can fully complete the project without further equity.
 
 2. Fixed-price build contract
 Developer locks in construction cost with a fixed-price contract, so equity + debt fully funds the project.

 

 3. No equity released until debt repaid
 Developer stays fully aligned until completion. Equity only comes 'off the table' once construction debt is repaid. 

 

These rules minimise risk not only for lenders but also developers. 

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𝗥𝘂𝗹𝗲𝘀 𝗮𝗿𝗲 𝗯𝗲𝗴𝗶𝗻𝗻𝗶𝗻𝗴 𝘁𝗼 𝗯𝗲 𝗯𝗿𝗼𝗸𝗲𝗻
At least seven lenders, including domestic groups, are now breaking these fundamentals for their highest quality sponsors (typically $100m+ loans) through the following: 

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 1. 'Pari passu' construction loans
 Each month, debt funds the majority of progress claims and the developer contributes a variable equity contribution. Equity is progressively injected into the project, not fully upfront, lifting developer EIRR.

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 2. Cost plus build contracts
 For long, large projects, build risk is shared. QS-backed budgets are agreed and a fixed builder margin applied on a cost-plus basis. Any later escalation is met with developer equity.

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 3. Pre-title residual stock loans with equity release
 Prior to completion and titles, a residual stock lender partly pays down construction peak debt while also providing an equity release to the developer.

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𝗞𝗲𝘆 𝗶𝗻𝘀𝗶𝗴𝗵𝘁𝘀
 1. Private credit availability for construction is at unprecedented levels.
 2. New entrants are introducing structures that weaken traditional risk protections.
 3. Many lenders (and developers) are unaware these products are now selectively available.
 4. 𝗦𝗼𝗺𝗲 𝗹𝗲𝗻𝗱𝗲𝗿𝘀 𝗲𝘅𝗽𝗹𝗶𝗰𝗶𝘁𝗹𝘆 𝗿𝗲𝗷𝗲𝗰𝘁 𝘁𝗵𝗲𝘀𝗲 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀 but others are following suit.
 5. Eligibility could well expand beyond 'top tier'.

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Developers and funders, have you seen these new lending structures?

Developers wanting confidential benchmarking of current terms, or introductions to lenders at the sharper end of the risk curve, are welcome to reach out. No exclusivity required.

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#developmentfunding #privatecredit #constructiondebt