Surging demand on home construction finance
House prices in Sydney have soared more than 20 per cent over the past year in what has become the strongest property boom in a generation. House demand driven by government’s stimulus program and lifestyle changes during Covid is maintaining at record high level. Major banks, controlled over 85 per cent of the commercial real estate (CRE) debt market before covid, have tighten up their exposure to CRE and reduced their share to 71.6 per cent. Non-bank lenders, fuelled by domestic institutional funders and global investment giants, pick up slack as big four retreat from construction loans. To fulfill market demand, lenders are diversifying their funding products and looking for niche market to push up their market share further.
While other non-banks are having intensive competition in funding for large scale development projects, leading non-bank lenders like Trilogy has expand their funding portfolio on land subdivision and house construction projects, which are featured by lower risk, easy to exit, high market demand, low requirements on capital outlay and high potential to achieve economic of scale, and has proofed its strategic success in meeting local housing market demand and deliver attractive returns to investors.
The demand for such financing solutions is expected to raise over short to medium term due to several factors:
Government’s HomeBuilder program keep stimulating housing constructions and demand on housing construction finance
In April 2021, the federal government decided to allow a further 12 months for construction work to start on house contracted under the HomeBuilder stimulus program, which give builders until 30 September 2022 to commence the work, rather than end of this month.
According to the government, 121,000 people had applied for the grant by the close of the program. Before the announcement, new house commencements jumped to 33,885 in the December quarter 2020 and 35,869 in March quarter 2021, the highest since March 2000,
largely due to work already triggered by HomeBuilder contracts. The extension of time smooths out the pressure and push the peak of commencement to 2021, if not 2022.
The program undoubtfully unleashes a national surge in construction and property industry, the lenders also saw a great demand on housing construction finance. Data from ABS shows value of new loan commitments for housing construction peaked in February 2021 before the announcement of commencement extension, recorded the historical highest figure. Post the announcement, loan commitment slowdown as construction smooths out. By September 2022, which is the end of the extension, it is anticipated that the rest of contracts under HomeBuilder program will start their construction and will need to be funded, which will push up the demand on housing construction loans again.
Larger dwelling preferences is set to endure post COVID indicating stable house demand & demand for house constructions
Working from home has become the norm and transformed the use and requirements of the Australians’ living space. During COVID-19, Australians have been spending most of time at home, and are placing greater value on the function, size and location of their dwellings. Strong demand for larger homes, with separate living and working areas, is set to endure and will have an influence on investment decisions and returns.
Record low interest rate and the COVID lifestyle shift will continue to fuel massive house demand. Will house supply catch up with demand for detached and semidetached houses? It is unlikely. In most of in-demand suburbs like Kellyville, Castle Hill, and Schofield, land/house stocks are very limited nowadays. Land price is soaring, house demand is surging, but the existing houses on market won’t be able to feed the strong demand. Developers are instead looking for smaller parcel to do land subdivision and build townhouses to meet local demand. We expected to see a stable demand for construction loan which drive by a continuing demand from house buyers throughout and post COVID.
Implications to Wharton
Wharton has been working closely with developers specialized in land subdivision and house construction such as Castle Group and Norwest Developments. In the past few years, especially during COVID, we have saw great success in funding for their projects in the most in-demand suburbs along Norwest Metro line and has delivered above average two digit return to our investors.
The investment management team appreciate the strong demand for larger dwelling in short to medium term and are actively exploring new opportunities to fund for smaller scale land subdivision and housing construction projects. Such projects, featured by short term, high market demand, low requirements on capital outlay and high potential to achieve economic of scale, have relevantly low risks but attractive return. Being one of the fast movers in the industry, we are expecting to launch a preferred equity fund in a few weeks to fulfil the strong demand and catch up with market trend.
If you want to learn more about investment opportunities of the upcoming fund for land subdivision and housing construction projects, please contact us info@whartoncapital.com.au.
Reference:
Insider tips for property’s new era
https://www.afr.com/wealth/personal-finance/insider-tips-for-property-s-new-era-20210919-p58sza
HomeBuilder extension to unleash boom in every corner of the country
‘The industry is going to break’: calls for HomeBuilder extension
APRA releases quarterly authorised deposit-taking institution statistics for June 2021
Quarterly authorised deposit-taking institution property exposure statistics - highlights
Lending indicators
https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
Building Activity, Australia
About HomeBuilder