Debt financing is the single biggest barrier to building more homes

Australia has faced a worsening housing crisis in the wake of the Covid pandemic, with affordability on the decline as supply growth fails to maintain pace with resurgent demand.

Small-scale developers have a key role to play in helping expand housing supply, particularly when it comes to in-fill developments in established suburbs. They continue to face major challenges, however, when it comes to financing their projects.

Australia’s housing crisis continues to worsen

Authoritative observers from industry and government point out that the state of Australia’s housing supply has continued to worsen, despite mounting outcry over housing affordability for ordinary Australians.

The resurgence of inbound migration following the lifting of Covid-related travel restrictions has created a sharp rise in housing demand, further exacerbating an unaddressed shortfall in housing supply.

Analysis from MacroBusiness indicates that over the 2022-23 financial year, Australia constructed 174,000 dwellings, compared to a record 626,000 increase in the country’s population. This has created a huge imbalance between new supply and incoming demand.

The federal government has already initiated action to help address the issue, with the national cabinet announcing plans to drive sizeable growth in Australia’s home supply back in August.

The plan calls for the construction of 1.2 million new ‘well-located’ homes over the five-year period starting from 1 July 2024, from an additional 200,000 new homes compared to the National Housing Accord target set last year.

The housing market still has a long way to go when it comes to fulfilling these targets. Figures from the Australian Bureau of Statistics (ABS) indicate dwelling approvals are still on the decline, falling 13 per cent in the September quarter compared to the same period last year.

Conditions remain acute on the financial front as well, with lending activity stymied by the Reserve Bank of Australia’s ongoing rate hikes.

Housing Industry Association (HIA) economist Tom Devitt points out that property-related loans currently languish at two-decade lows. The September quarter saw loans for the construction or purchase of new homes plunge a stunning 27.7 per cent compared to the same period last year.

“Lending activity has been weighed down by the fastest increase in interest rates in a generation. This is drying up the pipeline of new home building work across the country,” Devitt said.

“This low volume of lending and approvals will produce a decade-low volume of new housing starts in 2024.”

Debt financing still the biggest pain point for small-scale developers

While the Australian government’s housing ambitions will require a greater contribution from smaller developers, this cohort faces major challenges when it comes to the financing of their projects.

CrowdProperty Australia conducted a groundbreaking survey of Australia’s small-scale developer community to acquire a deeper understanding of the pain points they face in the current market environment.

The survey garnered 267 completed responses from 188 active small-scale developers around Australia. Questions covered a broad range of topics, including the background and experience of respondents, as well as their preferred project types and key pain points as developers.

The survey found that debt financing remains the single biggest barrier to building more homes, with 56.14 per cent of small-scale developers considering it their number one challenge.

Small-scale developers also said they waste too much time trying to solve project finance, as opposed to working on the actual task of building new houses.

They also expressed widespread dissatisfaction with the financial services provided by traditional lenders, giving them an overall negative Net Promoter Score (NPS).

Given the critical role that small-scale developers are expected to play in national cabinet’s housing plans, these financing pain points could undermine Australia’s efforts to overcome the home affordability crisis.

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Small-developers want to play a greater role

Given the current state of the market, the property sector needs to dramatically accelerate the pace of development in order to satisfy the Albanese and state government’s ambitious housing targets.

Members of industry point out that small-scale developers could play a critical role in expanding home supply under the national plan, given that the target calls for homes that are “well-located.”

Well-located homes mean these new dwellings must be located in existing urban areas that are already equipped with infrastructure and amenities, as well as situated within reasonable proximity of business and employment opportunities.

For this reason, much of the new housing under national cabinet’s plan is likely to assume the form of in-fill developments in established suburbs, involving the conversion of empty spaces or older homes into new forms of accommodation.

In many cases, smaller developers can be better suited to certain types of in-fill projects than large-scale developers. They are highly flexible and adaptable, which can make it easier for them to deal with the variable circumstances that in-fill projects in established built environments can entail.

Marketplace lenders can solve financing pain points

Australia’s traditional banks are large-scale financial institutions with established business models, often lacking the flexibility to make rapid changes to their lending practices.

For this reason, it could be difficult for them to adapt to the funding needs of small-scale developers, as they’re called upon to play a greater role in the expansion of Australia’s housing supply.

This is where specialised marketplace lenders like CrowdProperty can step into the breach, helping to solve the financing challenges of property developers and alleviate Australia’s housing crisis.

CrowdProperty overcomes the debt financing challenges of small-scale developers by using an online platform to match funds from a diverse range of investors with individual property projects of their choosing.

“CrowdProperty Australia is helping to overcome this issue by attracting new sources of debt capital to the market,” said David Ingram, CEO, CrowdProperty Australia. “We do this by enabling anyone to invest through our platform and to help build more sorely needed homes where people want to live.”

As a marketplace lender specialising in the property sector, the CrowdProperty platform presents advantages and benefits for both investors and borrowers.

On the investment side, CrowdProperty’s team of industry experts conducts thorough due diligence on development projects before making them available on the platform. This saves investors time, money and effort, while also providing them with an initial level of reassurance.

The CrowdProperty platform enables investors to allocate sums of as little as $2,500 to property developments, making them accessible to all players down to the retail level.

For institutional investors, this level of control gives them the ability to diversify their portfolios across a broad range of individual projects, as well as different sectors and geographic regions in the property sector.

CrowdProperty also offers strong returns to investors at a considerable level of safety. Retail — everyday investors can earn up to 8.5 per cent per annum target income returns* that are backed by first mortgage security, while the platform has a proven track record of 100 per cent of completed projects being fully paid back. Wholesale and institutional investors can make further target income returns.

All of these advantages make it much easier and more convenient for investors to allocate funds to property projects, thus helping to overcome the debt financing challenges that remain a major barrier for small-scale developers.

On the lending side, CrowdProperty provides a range of other advantages to borrowers. CrowdProperty’s team of experts can provide specialised advice to developers, serving as partners for their projects as opposed to just providers of funds.

Because of the specialised nature of its team, CrowdProperty can also review and approve applications for development loans far quicker than established financial institutions which lack comparable in-house expertise.

By catering to the needs of both investors and borrowers, CrowdProperty helps to facilitate the funding process at either end of the equation. This can overcome the problems with debt financing that Australia’s small-scale developers have long struggled to overcome, and in turn, empower them to help solve the country’s financing challenges.

Learn more about the barriers facing small-scale developers face and what they need to overcome them. Download the report.

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