Asian investors fund local lender in bullish developer play

The real estate division of Challis Capital Partners was this week awarded its largest-ever investment mandate since it was established two years ago.

A private consortium of Asian investors has awarded the group a $100 million investment mandate to seek ‘special opportunities’ within the Australian property development market, with a preference for projects in the major cities such as Sydney and Melbourne.

Challis Capital Partners will use the funds as equity investments in mid-sized commercial and residential property developments around the country.

The first two placements will be made in residential apartment developments in Sydney’s western suburbs. The first project is a $70 million residential property development in Ashfield, comprising 57 apartments with a mix of one, two and three bedrooms, including six townhouses. The second is a $65 million 120-apartment development in Penrith, with a mix of apartment configurations. An equity placement of $7 million will be made in the Ashfield project and a $4 million equity placement will be made in the Penrith development.

This is the first in a new series of innovative investment solutions Challis Capital Partners has designed to help fill the gap in the loan market for property developers.

Challis Capital Partners director Bill Salouris said foreign investment in the housing market, as well as an active market of mid-sized developers, is essential to address Australia’s housing shortage.

“While there has been a significant recent pick up in apartment construction, the banks have also limited or completely stopped funding to this market. This has created huge demand for finance for quality residential apartment projects around the country,” Mr Salouris said.

“This line of funding will allow experienced mid-market developers to fund land purchases and to provide the much-needed equity shortfall imposed by the current tighter lending restrictions.”

With the lack of appetite from traditional lenders for these projects, firms such as Challis have developed novel solutions to fund this part of the market.

While the consortium has committed to an initial $100 million mandate, Mr Salouris said it has appetite and capacity to commit several further funding rounds to the Australian property market.

“It’s a clear demonstration of the Asian investment market’s upbeat view of the Australian housing sector over the longer term,” he said.

The news comes after Brisbane-based broker and Better Business Award-winner Daniel Holden explained that he is increasingly securing funding from overseas investors to finance local property developers.

“Accessing private capital became a bigger part of the picture,” Mr Holden said.

“In FY16 we did $328 million,” Mr Holden explains. “About 28 per cent was major bank. The first four months of this financial year it would be less than 28 per cent. Less than one in five projects is being funded by a bank.”

HoldenCAPITAL has managed to increase its volumes by 46 per cent in 12 months by bringing in a wide range of private capital, including mortgage trusts, private lenders, high net worth individuals and syndicates of high net worth families.

But the biggest funding pipeline is coming from overseas.

“We are now doing deals with hedge funds in Asia and sovereign wealth funds,” Mr Holden said. “We have done four trips to Asia in the past 12 months, we are about to go again in the first week of December.

“We meet with these players to explain the Australia market, the opportunity in the supply and demand of money and the risk-reward profile of deals available.

“Asia has been a pretty decent player over the last 10 years we have been in this space. In mezzanine debt, preferred equity and JVs. Trying to get people interested in lending money at 9 per cent and explaining it might be a lower reward than 15 per cent but it is also lower risk.”

[Related: FIIG JV funding developers as majors avoid sector]