31 Oct 2013
Words Tim Admin

A Word On Finance Trends

Interesting developments in the accommodation industry lately, particularly with the lenders. After the GFC most lenders really restricted lending to business unless they had real estate based security. So called specialised lending for assets such as motels’ caravan parks and managements rights was impacted by the events of 2007 – 08, particularly for leaseholds. Over the ensuing years bank credit policy has slowly improved ad the appetite for funding these assets is now as good as it’s been for years. We are seeing a real slow down in bank home lending credit growth and some of the lenders are attempting to continue to grow their loan portfolios by being a bit more adventurous with business finance. The flow effect for purchasers of accommodation assets has been mainly positive as a result. Just to set record straight current bank policy gearing ratios for most lenders is as follows: Management Rights - Qld- 70% of combined value of unit and rights Management Rights - NSW and elsewhere – 65% of combined value of unit and rights Freehold Caravan Parks – 60% Freehold motels – 65% Leaseholds – 50% Supporting Residential Security – 80% Now here’s the thing. We have recently settled management rights deals in Queensland and New South Wales at gearing ratios in excess of these guidelines. We have settled leasehold motels up to 60% gearing and we currently have a freehold motel approved at 75% gearing. Given that we assist clients all over Australia we’ve got a pretty good feel for what’s happening with the banks and here it is. While one major bank has reduced gearing on leaseholds to 35% two of the other majors have decided that the accommodation industry is a good bet credit risk wise and they have told me that they will be as flexible as possie in order to do deals. The bottom line is simple. Money is cheap and the yields on these assets are at least twice the cost of debt in most cases and in the case of leaseholds up to 4 times the cost of debt. Given these returns borrowers can afford to gear up and then reduce debt quickly to bring debt levels down to standard bank policy levels. Of course, if you are new to the industry and have no business management experience then gearing levels will ultimately reflect this. The other thing to think about is this. If you have equity in your home or investment property now is perhaps not the best time to sell. The banks will happily look at lending against your property assets and in some cases will provide 100% finance + costs provided you have enough equity. This scenario works particularly well for leaseholds where the returns can be over 30% and the net cost of debt as low as 7%. If you want to learn more about gearing, debt servicing and your capacity to purchase just give me a call. All discussing are obligation and fee free.