What are the ‘fund gates’ referred to?

Open-ended credit funds pool investor capital and lend it into longer-term assets such as construction loans. Investors may be able to request redemptions, but the underlying loans cannot necessarily be converted to cash at short notice. If redemptions exceed available liquidity, a fund may need to sell loans at a discount or suspend withdrawals — commonly referred to as ‘gating’.

Gating does not necessarily mean the underlying loans are impaired. It reflects a mismatch between investor liquidity expectations and longer-term assets. Concentration in a particular borrower, sector or location can amplify that risk. The structural issue is not new. Dan discussed it in the second edition of the Constructive Finance book in 2021: borrowing short and lending long can create liquidity pressure when markets tighten. We are not suggesting current conditions are comparable to the GFC; the point is simply that a pooled structure does not, by itself, remove liquidity or concentration risk.

Why your HCP position is different

You do not hold units in a pooled fund. With HCP, you hold a share in a standalone, named loan advance, secured by a first-registered mortgage over a specific project property with a specific borrower. That difference is important to your investment risk. Key elements include:

There is no redemption queue.

Your capital is committed to the specific loan and is ordinarily returned when that loan is repaid. Repayment can occurearlier than expected where the project completes and repays early, or later if the project requires an extension.

Your security is registered.

A first mortgage over the project land. Not a share of a pool of projects. Not a beneficial interest in a portfolio.

There is no cross-collateralisation.

Your loan is not impacted by other projects being managed by HCP. If another borrower on our book has a difficult year, your security position over your own project is unaffected.

You know the project details.

Our loans are overwhelmingly located in Brisbane and South East Queensland. Before committing funds, you receive details of the project address, developer, builder, valuation, QS reports, overall project feasibility and sales strategy. That is the whole of your exposure; other HCP loans do not form part of your security or repayment source. The trade-off is worth stating plainly: because you are not in a pool, HCP does not diversify your investment for you. You carry the risk of the specific project, borrower and location. Investors can build diversification themselves by participating across separate HCP loans, and we encourage investors to do so.

100% of required funding is raised upfront

HCP raises the full funding required to complete the project before settlement. This provides investors and borrowers with confidence that committed construction funding and contingency are available to meet approved progress claims as they fall due, rather than relying on future investor inflows or claim-by-claim capital raising.

How we manage the loan once funds are advanced

We use a panel of valuers and quantity surveyors, whom we instruct directly rather than through the borrower. Every progress claim is assessed by our QS before funds are released, and cost to complete is rigorously tested and maintained at each draw, not simply assessed at the start of the project and then assumed.

Active Loan Management and Communication

We maintain regular investor communication throughout the loan and stay close to each project through QS reporting, site inspections and direct engagement with borrowers.

Keeping it local

Because our lending is concentrated predominantly in Brisbane and South East Queensland, our team also has strong practical knowledge of the suburbs, builders, agents and market conditions relevant to each loan.

No growth for growth’s sake

Currently, we have approximately $130 million on the loan book across roughly 20-25 projects, and have settled close to $680 million since 2017. We deliberately maintain the loan book at a level that allows us to remain selective, keep management resources focused and speak to the position of every loan at any time.

Successful sponsors aren’t trying to be the smartest person in the room. They know that successful property development is rarely about chasing the next big thing, testing an unproven concept, or trying to pick the market. Instead, they stick to the fundamentals.

They identify locations with proven demand, apply strategies that have worked before, and focus on consistent execution. Rather than reinventing the wheel, they refine their processes, manage risk carefully, and build on what they know works. Not every early bird catches the worm and they are often the second guy in after someone else has identified the opportunity, and most importantly, proven its viability or otherwise.

The recently announced Federal tax reforms may well reinforce this approach. Proposed changes to negative gearing and capital gains tax are expected to dampen some speculative investor activity and place greater emphasis on new housing supply and developments with strong underlying fundamentals. Under the proposed framework, new-build projects remain a sound target, while investment in established property will likely become less driven by tax outcomes.

For developers, the implications are likely to be more subtle than dramatic. We may see fewer participants entering projects primarily for tax advantages and more attention given to developments that stack up on their basic profitability. Quality product, sensible pricing, and genuine owner-occupier demand are likely to be the more important ingredients for success.

For HCP, sponsor selection remains the most important aspect of risk management. Markets will always move in cycles, regulations will evolve, and tax settings will change. But experienced developers with repeatable business models, proven delivery capability and a track record of producing quality outcomes are generally best placed to navigate uncertainty and create value over the long term.

At the end of the day, tax settings can influence demand around the edges, but over the long run it’s experience and execution — not tax policy — that determines development success.

As investors search for alternatives to low-yield term deposits and volatile equities, many have turned to private credit funds.

These funds often promise attractive fixed returns, secured by tangible property assets, supported by the growing demand for housing and infrastructure.

But while the concept is sound, not all private lending options are created equal.

Most lenders in the market offer investors exposure via pooled funds—a diversified basket of loans across multiple projects.

While this may provide a sense of risk protection through diversification, it also distances the investor from what their money is actually funding.

In these structures, investor capital can be allocated across dozens (or even hundreds) of loans, and individual project performance is blended together.

The result? You can lose visibility and control.

Dan Holden knows all about changes and how to embrace them. In December 2011 he began HoldenCAPITAL, servicing a few select developer clients and the business quickly grew into Australia’s #1 Commercial finance brokerage firm as voted 3 years running at the prestigious ABA awards from 2016 onwards and was subsequently honoured as a BRW Fast starter and BRW Fast 100 business.

Building on that success, in 2017 Dan, joined by Gary Connolly, launched HoldenCAPITAL Partners (HCP).

As a boutique lending business aimed at meeting a need he had identified to service the smaller end of the development sector that we felt was not getting the sort of dedicated attention it warranted. During that short seven years, HCP quickly grew into its current structure, providing over 200 development loans, and advancing over $530million of funding to the sector.

We thought at this pivotal moment it was an opportune time to re-brand HCP with a new website.

The chance to clearly identify what HCP provides in the way of services and what it stands for in the manner of its relationship lending to those developer clients.

Because what hasn’t changed over the course of the journey, is HCP’s commitment to delivering innovative and flexible development related finance to its clientele. The HCP team remains dedicated to finding the best loan structures that deliver flexibility at competitive pricing.

We are also continuing to provide our loyal investors with what we consider to be well-conceived, carefully researched and appropriately risk mitigated loan facilities based on the feedback we receive from both sides of the equation.

The same goes for lenders who take a sensible approach, as this isn’t the time to shoot for the stars. It is the time to bed down your business model, evaluate the risks and how you will manage them and then focus on execution of those plans. It certainly isn’t the time to allow those with untested business plans to distract you.

‘Smart and disciplined’ is the key theme for FY25 across the board.

With this in mind, HCP has been rigorously updating and refining its approach and due diligence systems, to try and provide developers with a quick ‘no’ where appropriate without limiting ourselves to just the obvious vanilla deals. The ‘smart and sensible’ discipline doesn’t mean that we have a closed mind, and where a deal makes good sense, even if it’s a bit counterintuitive, it will get a fair hearing.

Equally, we remain cognisant of our responsibilities to our investors who are the life blood of this business. As always, we aim to provide a diversity of investment opportunities within our stated parameters, aimed at delivering well-conceived, researched and delivered products that meet their risk appetite. To do this also requires us to maintain the same type of discipline we expect of our borrowers and we continue to research the markets and listen to the feedback from all sources in order to achieve these objectives.

We see the next 12 months as being not dissimilar to the last, requiring us to sift carefully through a steady supply of deals while dealing with the inevitable challenges the market will though up.

We certainly remain up for it.

HCP is also seeing instances of a few loans playing musical chairs, looking to jump from one lender to the next in the hope of breathing new life into the project as the current lender loses patience or simply looks to exit in order to enable their capital investors to realise their returns. New lenders in particular, are quickly presented with those stale loans in the market place looking for a home.

The market place seems quite stable in terms of funding product offering and pricing. Some take more risk than others on pioneering product types or lower presales / exit but generally speaking most experienced lenders are presenting similar product within a predictable pricing band often driven by appetite, particularly for the new comers or those less experienced at pricing the inherent risks.

Infill residential remains a sound focus for small to medium size projects, although there are signs that the inner-city apartment market will produce opportunities provided that the land can be acquired at a sensible price. This remains the primary challenge to developers as there are clearly defined pricing ranges and construction has become more predictable albeit with continuing inflation to be provided for.

A bigger challenge is the master planned housing sector, particularly in SEQ where there is considerable demand but a significant undersupply as a result of continuing net interstate migration. However, without a change in the town planning approach at both State and council levels, this situation will continue to fester and put added pressure on existing land values, squeezing feasibilities and making it difficult for developers to make deals stack up.

Small industrial office warehouse and trendy ‘man-shed’ product continues to present opportunities provided the surround demographics and supply remain in balance and we see this continuing in the short to medium term.

Generally, HCP is seeing that there are plenty of sound projects suitable for funding, and provided the sponsors are financially capable, experienced and making sound decisions in respect of their builder and project consultant choices, there are signs that volumes will be consistent if not plentiful.Infill residential remains a sound focus for small to medium size projects, although there are signs that the inner-city apartment market will produce opportunities provided that the land can be acquired at a sensible price. This remains the primary challenge to developers as there are clearly defined pricing ranges and construction has become more predictable albeit with continuing inflation to be provided for.

A bigger challenge is the master planned housing sector, particularly in SEQ where there is considerable demand but a significant undersupply as a result of continuing net interstate migration. However, without a change in the town planning approach at both State and council levels, this situation will continue to fester and put added pressure on existing land values, squeezing feasibilities and making it difficult for developers to make deals stack up.

Small industrial office warehouse and trendy ‘man-shed’ product continues to present opportunities provided the surround demographics and supply remain in balance and we see this continuing in the short to medium term.

Generally, HCP is seeing that there are plenty of sound projects suitable for funding, and provided the sponsors are financially capable, experienced and making sound decisions in respect of their builder and project consultant choices, there are signs that volumes will be consistent if not plentiful.

This continues to put pressure on the industry with builders and particularly sub-contractors continuing to feel the pinch resulting in high levels of financial failures occurring. Hopefully those that survived the pinch, have now got profitable projects on their books and their balance sheets recovering to a position of strength.

HCP has recorded high levels of enquiry during the last half of the financial year, however it is this sticky inflation, which continues to forestall the RBA’s ability to reduce interest rates, which has also put pressure on developers looking to get their project metrics to stack up. This has seen them often forced to try and find solutions through redesigns, or recutting configurations and finishes, or simply putting the project on hold when the reality becomes apparent.

Market demand has remained relatively strong, particularly in SEQ where projects that did measure up and are underway have been well received, with days on market being relatively short. Recently published time on market statistics show that Brisbane at 23 days, Sydney 33 days and Melbourne 35 days, are providing relatively quick exit rates for completed stock provided developers are realistic.

HCP has also seen evidence of developers looking to compensate for those increases on delivery costs by holding out for values above market expectations only to suffer addition losses as the product then becomes stale.

The other common mistake that has tripped up many developers is spreading their resources, both operationally and financially. Too often we see developers who have not experienced the property cycles, taking on too many projects only to find themselves fighting multiple fires on multiple fronts and with limited financial resources, spreading your resources too thin is a recipe for disaster. This is particularly true when they are reliant in investor funds which typically dry up or look to be recouped during tough times adding to the pressures to get the job done.

None of this was totally unexpected and while it was a somewhat challenging past 12 months, for the most part we have seen our loan book cope very well with these pressures and we are confident of slightly better launch platform as we enter 25/26FY.

Here are some key questions you really should consider asking your prospective lending partner before committing on the dotted line;

1. How many construciton loans did you do last year?
2. What is usual turnaround time for indicative approval and then full approval?
3. Have you ever issued a term sheet and not been able to raise the money?
4. Can you provide an outline of how detailed your Credit DD requirements are?
5. Can you show me 5-10 recently funded projects similar to the one I am about to undertake?
6. Can I choose my own valuer and/or QS or do you insist on choosing and keep me from talking with those consultants?
7. Could I talk to 2-3 referee developers who can give me a feel for how you conduct yourselves as a lender?
8. Can you give me examples of where you resolved a loan situation where things haven’t gone according to plan and you were considerate of the developers needs i. e. a time extension was required through no fault of the developer?
9. What is usual turnaround time for progress claims?
10. Have you ever not been able to pay a draw-down of a project due to liquidity constraints?
11. Have you ever shut the doors to new lending for a period of time i.e. during Covid did you still operate and fund new projects?

HC welcomes discussions around these factors, whether it relates to lending via HCP or any other of our approved funding providers,   these discussion are an important part of building trust and confidence in the relationship.

It is somewhat akin to choosing a builder, you want to know they are seasoned professionals not cowboys who are learning on the job and using you for that experience.

We believe that it’s important that every element of your project, including the funding, is properly scoped, costed and documented so that you can concentrate on the risk factors you have identified without surprises.

Happy funder hunting.

Just in case you had been looking at the glass as half empty, let’s review some of those recent challenges and why it is time to be thinking half full;

1. Materials

Both supply and cost have been under pressure for some time however, our research indicates that supply is for the most part no longer an issue, while the pressure on costs has for the most part substantially eased to be in line with the broader inflation levels. While there remains some pressure on wages in the industry, this is expected to be manageable, predictable at worst.

2. Clearance rates

Tthe “days on market” measure has become extremely tight on the Eastern Seaboard at 22 days for Brisbane, 35 days for Sydney and 36 days for Melbourne. Which means if you list a new property for sale and it is priced correctly and meets market expectations, you should be receiving acceptable offers within the first few weeks of your being on market.

3. Approvals

Council approval timeframes are still slow however, lower recent activity should mean that certainly in the shorter term,  they are less congested going forward they can action things quicker than previous years. While still not perfect or reliable we are hearing reports of some developers getting approvals in weeks instead of months.

3. Activity

Lower DA & BA activity resulting in lower job starts should translate into builders being more hungry for new work to fill their pipeline, and we are seeing evidence of this, particularly in building tender responsiveness

4. Funding availability

As we cover in our funding landscape piece in this market update there has been something of a reordering of the sector with many participants withdrawing or resetting their appetite which means there is probably greater stability and clarity for developers. That said, there continues to be a constant influx of new players of unknown performance capabilities so the subtext is that you still need to do your homework to ensure delivery is solid in all aspects of the process.

So, in terms of the way forward in 2024, we believe that it’s not the operating conditions that are the challenge, the real hurdle is finding new opportunities that stack up.

We have seen many feasos which need to be worked and re-worked in order to find the key to unlocking the real potential. We often work alongside the developer to help them tap into third party info that will do this because we know that the good developers find a way by doing the hard yards while other rush the process and fall short. Time to earn your stripes.

Taking into account all of the above, we see the path ahead as calmer than previous years and with the obstacles developers have had to overcome far more manageable.

To discuss your next project and let us show you how we can get constructive with your finance, give us a call.

As well as trampling on the rights of many of our investors, these changes would have a significant impact on our business and the funds management industry in general.

In March last year Stephen Jones, the Assistant Federal Treasurer, announced a review into property based managed investment schemes (MIS).  The justification for the review were the actions of a firm called Sterling Property that operated property schemes and lost a significant amount of investors’ money some five to six years ago.

Despite the fact that Sterling operated in the “retail” space and held an AFSL, ASIC and Treasury have used this event to also justify a review into the actual definition of what constitutes a “wholesale” investor.  

Read the press release by the Federal Assistant Treasurer.

This review is being done “under the radar”, without community consultation, and it is certainly against the best interests of those people that currently qualify as wholesale investors including many of our own investors.

If these changes to the criteria are approved, the non-bank lending sector, which provides significant funding to Australian businesses, will find itself starved of funds resulting in:

• Large numbers of existing wholesale investors being prohibited from participating in investments that they have enjoyed in the past;
• Financially competent, astute & savvy consumers will be forced into retail offerings with their commensurate higher compliance costs and lower returns;
• Competition will be significantly lessened with the “top end of town” benefiting by driving out smaller Funds;

We are reaching out to all our investors regarding an important issue which could significantly impact our ability to operate as we currently do and we need your help.