Development stifled by no cash.

That is the sombre message from research by international property and construction consultants Davis Langdon. Finance has been  severely limited in the wake of the global financial crisis (GFC) and neither developers nor financiers expect the situation to improve for at least 18 months.

Davis Langdon recently surveyed key decision makers in senior development and finance positions from Australia and New Zealand which identified key barriers and possible measures to alleviate credit constraints in the industry.

Davis Langdon's Australian and New Zealand research manager, Michael Skelton, said participants included those seeking funding for projects, as well as brokers, consultants and representatives from financial institutions that are well known to the industry.

Although opinions are mixed regarding when credit restrictions will ease, developers and financiers are certain there will be no change during 2010. Nearly 60 percent of financiers expect the situation to turn around in 12 to18 months while most developers have a more pessimistic outlook and are expecting to wait 18 to 24 months.

"We found that access to finance in the property and construction industry is a key concern," Mr Skelton said.

"Developers viewed the loan to equity ratios as very conservative and unworkable, particularly when combined with shrinking valuations and a lack of second tier finance, while the finance sector primarily cited a turnabout only when global markets become less skittish."

Davis Langdon's research highlighted key issues:

•   Lending for construction projects is restricted - limited lending targeted at cash flow assets, not construction.

•   Recovery in lending liquidity is not expected for at least 18 months.

•   Developers are losing interest in local banks and looking more at private syndicates for funding.

•    Risk assessment criteria is considerably more stringent.

•    The residential sector continues to surge ahead of other sectors, but with great caution.

•    The finance sector remains highly concerned about the lack of competition in the market place.

Mr Skelton said excluding government stimulus projects, the Australian Bureau of Statistics Work Done and Work Commenced figures in the non-residential sectors are down 34 percent and 52 percent respectively from the highs of 2008.

"You have to ask that, without improved access to finance, are we at risk of a double dip in construction work after stimulus work ceases?" Mr Skelton said.

Of the developers surveyed 74 percent have sought finance for projects in the past six months or were seeking it at the time of the research.

About 76 percent were seeking finance for projects less than $200million, while 13 percent were looking to fund bigger projects over $100million.

"These developers were mostly seeking finance for residential projects with 46 percent targeting this sector," he said. "Industrial and office followed as the next most sought after sectors for finance."

Mr Skelton said only four percent had tried to obtain finance for refurbishment and civil and resource projects.

"Interestingly many of the developers and financiers identified the same barriers to financing projects and they were the loan to equity ratio, the risk profile of the project, the level of pre-sales and the risk profile of the sector," he said.

"However, financiers were more focused on levels of pre-sales (68 percent) and risk profile of the sector (45 percent), while 70 percent of developers cited the loan to equity ratio as their number one obstacle."

Finance respondents conceded that the industry was suffering from a lack of second and third tier lenders for moderate to higher risk transactions or mezzanine finance.

There was some common ground between participants in Australia and in New Zealand with both agreeing on the importance of pre-sales, but more Australian respondents (62 percent) saw the risk profile of the sector as a greater factor than in New Zealand where 49 percent saw the risk profile of a particular project as more important in obtaining funds.

"Respondents also highlighted the concern that financing in the property and construction industry was affected by broader issues in the economy, both locally and on a global scale," Mr Skelton said.

"Several mentioned lender capacity and the cost of raising capital, particularly when global markets are still nervous.

"A move by banks to limit their exposure to the property and construction sector was identified as another obstacle faced by the industry.

"Not surprisingly, the increased risk of construction and development loans - which are inherently more prone to fail in a downturn than secured loans due to the potential for construction lags - meant they were less likely to obtain funding than existing cash flow property assets."

In terms of the various individual sectors, residential proved the most difficult with 75 percent of developers and 54 percent of financiers placing it in this category.

Civil and resource projects were considered the easiest by both groups as was the health sector. Conversely 50 percent of developers and 73 percent of financiers found tourism projects tough to fund.

Developers indicated they would consider moving away from domestic bank funding, down from 56 percent to 36 percent with their leanings towards private syndicates shifting from three percent currently to 11 percent in the future.

Domestic private equity and offshore private equity was also on their radar.

Overall, New Zealanders have a more positive outlook with a majority expecting a better finance situation in 12 to 18 months, whereas most Australian respondents are expecting to wait over two years. This may indicate that New Zealanders seeking finance from Australian banks could be faced with protracted credit constraints.

Mr Skelton said the survey showed there were still a lot of challenges ahead for the property and construction sector. The abundant levels of credit for construction projects secured in the past decade would not return in the near term, he said.

Davis Langdon will continue to measure developer and financier views towards access to finance in their on-going quarterly construction sentiment survey.

www.davislangdon.com

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