Darren sits down with Gary Connolly (no relation!), Head of Lending and Investments at Holden Capital Partners, to explore construction finance and how non-bank lenders have reshaped property development funding in Australia.
Gary explains why developers are often willing to pay more for speed, certainty and a lender who understands their project. They cover the history of construction finance, the role of serviceability and presales, risk and diversification, and the role it plays in an investment portfolio, plus the outlook for Southeast Queensland over the next 12 months.
Hello and welcome to the Investment Markets podcast, where we aim to discuss investment matters that impact self-directed investors. I'm your host, Darren Connolly, CEO at Investment Markets. And with me today is Gary Connolly, Head of Lending and Investments from Holden Capital Partners. Today, we're going to be doing a deep dive into construction finance. However, before we get into it, I need to remind you that this is all general advice and general information only, and nothing in this podcast should be construed as an investment recommendation. As always, you will need to decide what is right for you. Welcome, Gary.
Thanks, Darren. Thank you for having me on.
Gary, let's set the scene a little bit and talk about construction finance. But before we do so, I want to really get a little bit of a history. So how did the sector really come about? How did it develop? Maybe a little bit of what happened through the GFC. A bit of a background just to help investors picture it all.
Yeah, look, I think historically, Darren, the major banks did the lion's share of construction funding and non-bank lenders were really limited to a role of providing some, you know, mezzanine finance and pref equity that might have complemented sort of major bank funding. I think the sort of initial shift then started to occur in the early to mid-2010, 2015, where the APRA and the capital adequacy measures started coming in place. Effectively what that meant is the banks really started to wind back their lending to property projects. And probably back to levels that they really wanted to be. I think at that point in time, that segment of their business had grown to a level that it really shouldn't have been. And when I say that, I think the banks really want to do 30 year home loans. There isn't that much margin in doing a 12 or 24 month construction loan. And so I guess over the evolution of APRA getting involved, those capital requirements, the GFC and everything that came with it, I would say that the market share from sort of bank to non-bank went from sort of, you know, 95.5 to almost now pretty much a level playing field, which is a pretty big swing in a relatively short space of time.
And you think of all the, it's funny what you wish for because all those banks are now probably overly loaded into residential home loans. And now everybody's talking about how that's probably a risk.
Exactly right. There's always something. And look, there are signs of the banks coming back again a bit, very selectively into certain sectors. But I think I can never see them sort of getting back to the levels they were during that period.
And what, maybe just as a little aside, what type of niches then do you typically see the banks stepping back into, even if it's not mainstream, the mainstream finance piece?
Yeah, I think it's probably very good long term clients. good balance sheets, very strong profitability in those projects. I think for any builder developer or developer that's trying to do any more than one project at a time, it's just not going to cut it with the banks in terms of their serviceability and the amount of equity that that client would have to contribute into a given project. I think stepping back in, but just to a select group of clients. Sector wise, look, I probably haven't got a huge amount of visibility over that. You know, we predominantly, we've been, HCP predominantly play in the residential industrial space. We see them coming a bit back into the resi space on a limited basis.
And for the rest of the market, so the majority sort of by volume and value I guess, what are the reasons that sort of the developers will maybe deliberately not want to go down that major bank routes? And they're more keen to deal with somebody else in the space, a non-bank provider for example.
Yeah, look, great question. We get it all the time from our investors. Why you? Why you? Like, why are the banks or why would a developer client pay three or 4% more than a bank? It looks a great question. I think it really comes down to two or three key items. One being serviceability and so on serviceability for a property developer. they have very, very lumpy equity and revenue requirements or events, should I say. You know, all the money goes in at the start of a project, they have to deliver that project, the bank has to get repaid and then they get their profits. And so to actually show ongoing serviceability can be quite troublesome for groups that don't have like large balance sheets or Potentially a builder developer client might have better serviceability where they've got income coming in from doing build jobs for others as well as their own projects. So serviceability can be a big one. Presales. So the banks will always want a level of presales.
Any particular percentage there that they look for?
The debt cover would depend on the asset type and location, but it's always going to be a requirement. And so probably to pause on those two things for a second, for a non-bank lender, we're not as focused on serviceability. because we capitalise our interest into our loans. It's more very sponsor driven and if there is a cost overrun that can't be covered by the contingency, has the client got sufficient financial strength to be able to find 300, 500k during the project if needs be. So it's less about their ability to service income. And so in terms of pre-sales, we're not pre-sale driven as long as it's not a pioneering project in a location that's sort of out of metro. And I think probably those two things over the last few years to kind of drill down a little bit further. So serviceability. Most developers will want to try and overlap some projects. So a typical HCP developer client might have two or three projects on the go at any one time. And so to try and do all of those projects with the bank is next to impossible because for the reasons I just mentioned. Whereas a non-bank can take a slightly different viewpoint, you know, when a project will be rolling off onto another, do a little bit of stress testing about where their peak exposure will be and do they have the ability to cover overruns across two or three projects at any one time. And then jumping back to pre-sales. So pre-sales have been good at some points in the market. But if you look back over the last two or three years where we've seen price escalations across materials and labor in particular, developers who had locked in pre-sales at the start of construction, what sort of played out during the period of time where they were building that project is that labor costs went up, materials went up,
Everything went up.
Everything went up. Some of it legitimately, others just saw it as a reason to hike their prices, which is probably a different conversation. But their revenues were locked in. So you would see projects that were maybe, you know, 20% profitability at the start of the project and at the back end, profitability was severely hurt. So Developers remember that now and, you know, it's very much, I would say the clients that we fund look at it and go, the best opportunity for me to get the best price for the product I'm delivering is once it's delivered at the back end, particularly for anything that's medium to high end, where the end buyer really needs to walk through it, see it, understand the finishes, get attached to the product, hopefully pay a little bit more as a result. And so, Why a non-bank? So we don't need serviceability and we don't need pre-sales. So they're two massive sort of hurdles already overcome. And I suppose the last point would be speed and certainty. So looking at HCP as a business, we've got four people on the credit committee. We meet every Tuesday. We can make decisions on loan during the week. It's days for a decision, not weeks and months have been stuck in the bank. So if we've got clients that are competing on a side or they have a settlement day coming up for a site that they've contracted, the ability for us to be able to say, yes, we like you, we like your project, we'll fund it and actually deliver on that. You can't put a dollar figure on that, but that certainty is...
It's cashflow, isn't it, in the end? The speed of decision makes a difference in the bottom line.
Exactly. And builder developers should be out there on site building, not stuck in an office trying to fill out serviceability calculators and get buried in loan application forms. And so I think the offset of paying a little bit more is the certainty and the ability to deliver a couple of projects at the same time.
Do you think that that cost escalation piece may have pushed developers into looking at shorter or smaller projects where they can actually turn things around faster and not have I guess, open themselves up the risk from a risk point of view to cost escalations over a period of time that can just... Because everybody's heard the stories about the number of developers that have gone into administration, they've hit the wall, things have happened. So, and correct me if I'm wrong, if you're doing smaller projects faster, you're reducing your risk of that happening. Is that something that you've observed?
Yeah, look, probably a variation of that. We've probably seen over the last two or three years in Metro Brisbane where we do a lot of our lending, obviously we're Brisbane based and as a result we stick to SEQ, jump in the car, drive to site, rather than having to rely on reports from interstate and infrequent visits. But
So you're getting your boots dirty.
We are, we are. Well, our loafers, you know, we don't go, we don't do many site visits on rainy days Darren, we pick our, we pick our times, but look, there was an awful lot of developers doing luxury in inner city, single bills in, you know, suburbs from sort of, you know, Camp Hill to Ascot or anywhere between if you draw a bit of a 8K circle around the city. And I think, People were buying sites, site values were going up. I think the general concept was the bigger and better house you put on it, the more you will get at the back end and it'll all work out.
And the values were going to go up as well at the same pace or even more.
Exactly right. Probably what we've seen in that market, it's been a bit tough. The buyer pool is a lot smaller than let's say the entry level townhouses or probably that one to two million dollar price point. So all at once there was a lot of product delivered in the sort of three to five million space. And that buyer is a bit more finicky as well. And so we've probably seen a number of developers deliver that type of product. not make much for 15 months of work. And now look and go, right, well, interestingly enough, those side prices have still kind of continued to rise because, you know, people can, mum and dads can still buy them to appoint a builder and build on it. And people are still kind of having a punt on that kind of product. But we've noticed a few of our clients kind of pivot and say, you know, That's a lot of work for not much return over a 12 or 15 month period and starting to do kind of medium sized townhouse projects, maybe 20, 25K out of Brisbane. And you look at the feasibility for those projects at the moment, they're actually really strong and the buyer pool is significantly larger. So if there's a shift I've seen in just a small test case that we have with our clients, it would be that.
Yeah, so it's that medium ring, so to speak, not out too far, but not in sort of inner city suburbs.
That's exactly right, Darren, and later on we'll probably touch on sort of areas of the market that are still particularly strong and charging along and those that are having a little bit of a speed bump at the moment.
So maybe then if we just dial back, you alluded to it a little bit Gary, but the origins of Holden Capital, how it came about, and then obviously sticking to your knitting, focusing on the Saudis, Queensland, not getting your love for us dirty, etc. With that, I assume that was a deliberate strategy and positioning that the business has decided to take. You've kind of alluded to it a little bit, I guess, in being able to visit the sites. But how did it all start? How did you get involved?
Well look, I'll probably go back a little bit of a step further. So obviously we're both Irish.
Nobody listening to this podcast will ever know.
Two solid surnames. So look, I did sort of law and banking in Ireland when I came out to Australia originally in 2009. I worked for another non-bank from 2009 to 2017. During that period, I suppose through that role and a bit socially as well, I got to know Dan Holden. the founder of Holden Capital Partners.
His name's on the door.
It is. And yeah, look after a bit of sort of catching up and talking through it. Dan sort of asked me to jump on board and kick off Holden Capital Partners in its current format. in 2017. So we've had a, I suppose, a really good journey. Like most businesses, we started out quite small in terms of the loan sizes and whatnot. But over the eight and a bit year period to now, we've done almost $700 million worth of lending to our property developer clients. And interestingly enough, The first two loan facilities we did in, I think, November and December 2017, those two developer clients are our top two clients to this day.
So they just keep coming back? Keep coming back, yes.
So that's been the journey. Interestingly enough, we didn't always stick to South East Queensland. As you grow and you have more capacity, you do fund in a couple of different areas. And we have funded some projects in Melbourne and in Sydney over the years. But we just sort of, I suppose our current, not mantra, but our current way of looking at things is that we want to make ourselves so busy in South East Queensland that we don't really have time to consider anywhere else. Yeah, just that ability to meet the developer on site, jump in the car if there's a delay, just to understand it a bit more. I think for our investors and from ourselves, from a loan management point of view, it's a valuable thing to do.
And maybe if I just can take you back to those first two clients being number one and two and still clients. What sort of super power does that give you? Because that's a seven or eight, nine year relationship you've got with those clients. And I assume they've done multiple products or so multiple projects with you. How does that help? How does that make the process easier?
I think it's a massive endorsement for us and anytime we meet a new borrower client that we're looking to fund, we'll tell them all about it. If we were bad to deal with, they wouldn't be coming back. I think the other point that we do volunteer is our lending products aren't necessarily the cheapest in the market. Our rates are investor driven. But there's a lot more to it than being the cheapest. It's like getting a quote to build a house. If you pick the cheapest, it doesn't mean you're going to get a good outcome.
You're usually going to be disappointed.
That's right. And so look over the years, one thing about property is you're going to have some issues on projects, you're going to have things that don't get delivered on time. And I suppose it's how we as a lender have worked with those developers over the years when things haven't gone to plan, is a big consideration in terms of them continuing to fund with us. And so we don't really get into an active quoting state in terms of the clients we deal with. Insofar that if someone comes into the boardroom and they say, oh, I've got a quote from XYZ lender, will you beat it? It's like, well, no, we want you to fund with us because you get a good feel for us and that we will deliver your project. If your main aspiration is to get the cheapest funding, we won't stand in your way. But if you'd like to fund it with us and know that we'll back you and we'll be there to support you. If something doesn't go according to plan, they're the kind of people we probably want to work with.
And if you were to look at all of those clients, what would a standard typical profile look like? So what would that average, in inverted commas, developer, what would they be doing? How big are they? Sort of what are they focused on? Just sort of give us a bit of a sense of a picture of who they are.
Yeah. Look, I think Entrepreneurial builder developer clients are probably the main fit for us. So some of our most successful clients and the two that we mentioned have building and development arms. So as I kind of alluded to earlier on, that does give them a nice balance between income coming in from projects that they're delivering, building for others, as well as their own. Probably developers doing two to three projects a year. We really don't want to fund someone who's trying to take over the world or do anything pioneering.
So the more you do, the more likely you are to trip yourself up. Is that an accurate observation?
I think so Darren. I think when you get a loan application that might come through to us from a finance broker or developer directly and you look at their CV and they've got 20 projects going on in different states, some lenders would look at that and go, wow, these guys are really experienced and they know what they're doing. That scares the hell out of us because you don't know who the lenders are on those projects, how they're going to behave, the knock-on effects and contagion risk as a result. So we, like guys that have been maybe 10 years with a big developer, they've been running the sites and they've gone out on their own, they've done a project or two that maybe done a couple of houses or a little land sub in there they're stepping up a bit more to commercial finance. We actually prefer that type of client.
So they're entrepreneurial but they're experienced and they know enough but maybe not too big.
That's right. That's right. And I think like There's a lot, I mentioned pioneering a little bit like, you know, you can't be all things to all people. So we don't do, you know, rooming accommodation, NDIS, aged care. We just like to stick to residential houses. townhouses, land subdivisions, industrial and from time to time, small retail. And I think our loan size being probably $15 million maximum, it attracts a certain type of developer client by extension that shouldn't be trying to take over the world and should just be trying to have a sensible growth within their business. And then there's a bit of an alignment between, you know, what they're trying to achieve and who we want to fund.
And has the industrial side of things, was that strategic or did it just happen? Was there an opportunity? Did somebody just come to you? How did that sort of pop its head up?
You'd think I planted that question, which I obviously didn't. I have a good story for you. So, yeah, I got a call one afternoon several years ago from an Irish guy and I couldn't really understand what he was saying. I asked him to slow down and he said, oh, we've got a project out in Redland Bay. We have a contracted. We were going through another non-bank lender and basically they've left us at the altar. We need to settle in two weeks. And I said, okay, how'd you hear about me? And it was a mutual friend. So, we jumped in. As it worked out, the quantity surveyor that we were using, we knew really well. The valuer that we were using was on our panel. Star is aligned and we settled the project two weeks later. So, that was 16 industrial sheds. We went on to do three other projects for that client. So, the builder of their first project, we funded three for him. And then one of our long-term clients, the top two, one of the top two did some projects in Caboolture. So, our industrial book went from kind of zero to quite a bit. And in fact, we probably had a period where those loans were advanced, repaid, and then we didn't have any industrial. Not by choice, it just didn't come our way. Exactly. But looking forward to the back end of this year, it's coming back with a bang. We're about to fund a project in Coolum Beach. We've got another one at Corball Park up the coast. A lot of industrial coming again. The benefit for our investors and I suppose us with industrial, Darren, is unlike a residential house or tenant house where it's a long journey, you can go from slab to till panels, to structural steel, roof up, quite quickly. And there's a lot of risk on out of the project. I think the market has been quite resolute as well in terms of the demand to purchase at the backend and also the rental. That being said, there's probably some areas that we wouldn't fund in, just probably a bit of you know, overshot the mark in terms of the amount of product it needed and yeah but it definitely forms a decent part of our current product mix.
And if we kind of flip it around a little bit and you were talking to some of those investors, And they're coming to you maybe for the first time, maybe it's a referral through a friend, like it seems to happen quite a lot. Yeah, barbecue talk. How would you describe the asset class to them over the barbecue?
I suppose the starting point is the funding provided has secured by a registered first mortgage over a real property asset. There are personal guarantees from the sponsors and corporate guarantees over the underlying company. And then you probably go on to explain a little bit more in terms of the sectors that you lend into. We touched on it before, probably houses, townhouses, industrial land subdivisions. And then the conversation progresses towards, well, how do you ensure that the amount you're lending out is the correct number and the builder, et cetera. And so I suppose the answer to that is, you know, a trusted panel of valuation firms and QS firms. Ultimately, the conversation ends with a loan to value ratio and explaining that to the investors. So the example I always give is...
Sitting at a prudent level, I assume?
Yeah, yeah, absolutely. So look, we range anywhere from about 60 to 69.5. And it really depends on location, product type, sponsor strength, et cetera. And yeah, the classic example you give to someone is if we're funding a project for 10 houses at a million dollars each, that's a 10 mil GR, our facility limit including interest will never exceed, you know, six and a half million dollars. And yeah, so that's the basic quick barbecue chat. If I'm asked the question, that's how I would explain it to someone.
And what's the, probably what's the number one curly question or issue that you actually got to spend time with people, maybe teasing things out. The one thing that they don't get.
Yeah, look. I'll give you a long answer. Our best new investor type is someone who's already invested with one of our competitors because they know the space. They've been there, done that. Obviously, your podcast goes out nationally, even though we've spoken a lot about Brisbane, but even speaking to new investors in Sydney and Melbourne who invest with non-banks down there. we're not asking them to come on board and replace that lender. We'll give them a bit of exposure to our repeat client base in South East Queensland. So firstly, that's our ideal client, someone who's already investing in the space.
familiar with the sector, the ins and outs, and invested before.
And invested before and knows that the key things will come down to a prototype, location, sponsor, builder, exit. Curly question is, OK, if I invest $100,000 today, when do we get my money back? Is it liquid? Is it illiquid? And the answer is, well, you're in there till the project's delivered and the sell down occurs. And for some people who haven't invested in the space before,
It's a bit scary.
Yeah, I suppose. I can jump on CompSec and click sell at any point during it. And it's a little bit different to that. So look, you can't provide a product that suits everybody, but we've got a nice group of investors, different sectors, which I'm happy to touch on if you want. But yeah, They know property, they get property, and they know that property often doesn't go to time.
Diversification is obviously, talk about shares, equities, the other asset classes, SpaceX, maybe we need to diversify away from Elon, who knows. When you think about diversification, what does it mean to you from a Holden Capital partners sense? When you're talking about the assets, the developers, how do you make sure that your investors are actually protected?
Probably two questions there. I'll tackle the diversification part of it first. So probably going back a step, Darren, as you know, there's two types of mortgage funds. There's a pooled mortgage fund and then there's the standalone mortgages or syndicated mortgage funds as they're commonly known. And I suppose in the past, the pooled mortgage funds is the most commonly available access to property debt to retail investors. And look, pros and cons, obviously I'm a big advocate to stand alone because that's our business, but for some of our really high net worth clients, they want to make a decision on every loan that they go into. So if you're in a pool fund, there's a broad set of parameters that the fund manager must stick to. But that money could be lent in locations that you would never invest in on a standalone basis if you were asked to. And so that probably lends itself to the next point. With our investors, all of our loans are standalone, as I just said. We've got an investor portal. We release two or three new opportunities a month.
And they all pick which ones suit their own criterion.
Absolutely. And so you effectively build your own portfolio by picking and choosing the ones you go into in a no stress environment. And so some people might look at a transaction and go, I don't like that location, or they look at another project, they really like it. And then for the illiquid nature of the standalone mortgages that we touched on a couple of minutes ago, I suppose if someone's got, let's say, a million dollars to invest and our minimum investment is $100,000, And they diversify that over our next 10 facilities. Those facilities will be in different locations, different asset types, different loan terms. Some will repay quicker than expected. Some will repay a bit later than expected. And it sort of just evens itself out from capital coming back. geographic diversification and sector diversification. And the key thing is the investor is making their own charge. Like most managers, we produce an information memorandum for every loan we do. It has everything in there from sponsor details, experience, builder, QS, valuation, exit strategy, some sensitivities. So they can really make an informed decision as to whether it fits within their risk appetite or not.
Yeah. So you get to drive your own bus, so to speak, and make your own decisions.
And that's right. And look, just probably touching on the... decision making and visibility. So obviously we're a construction lender. Every month we do, you know, 25 to 35 progress claims to our projects. Every time that we advance funds to a project, we'll do an investor update. It's not 20 pages, it's probably two or three, saying this is the work that's been done on site, this is the amount we've advanced, here's the completion date versus the loan expiry, some photos. Often it'll be Dan and I on site doing a quick video from time to time, we'll chat with the developers. get them to explain where we're up to with the project. And I suppose the feedback from the investors is they're kind of along for the journey. We never get many phone calls asking us what's happening with a loan because I suppose we're that proactive with our updates that there's rarely a reason to be.
And sort of if we consider when those opportunities actually come to you for the first time or hit the credit committee for a first time, what's the, because that's sort of the update of where the deals are, but what's the starting point? What does sort of that look like? What processes and procedures do you run on the deal when sort of it hits your desk for the first time?
Yeah, so look, credit committee, as I said earlier on, Nimble, we've got four people on our credit committee with diverse backgrounds. So Steve, our non-exec chairman, was head of property at Macquarie Bank for 27 years. Paul Wood, I've worked with in my previous role for eight years and he's been with us now over four years and he's been in property debt longer than he'd probably care to admit. And then obviously Dan, the principal, has a huge extensive sort of knowledge of the industry. So all four of us need to unanimously agree on a project. There's no one that can sit in a fence, which is a really good thing for the investors. And so the starting point is the person. So sponsor is the first thing. Obviously you'll get a feasibility and a bit of a bio sent to you via email or via phone call. And the first thing we'll do if the project fits within our general appetite is come into the boardroom or we'll meet you on site. And you can know within two minutes whether it's someone that you're going to be comfortable lending some money to or not. So we're very sponsor driven. So if we get over that hurdle, it then comes down to the project type. Is it a logical project for the area that's been delivered? What's the depth of market for it? Do we know the builder? Brisbane's a small place, as we said before we came on air. A couple of quick phone calls can quickly tell you whether they're a good person to deal with or if someone says no comment, you kind of have heard enough. And we've had a few of those over the years. But yeah, it gets down to the nitty gritty then of the feasibility, the modelling. valuation report, QS report, ultimately our analysts, we've a couple of analysts, our analysts will produce a credit paper for formal review and at that point in time we'd give an offer to the developer to Proceed with the funding and then you're into loan docs and settlement and all the fun stuff So it's a bit of a journey like we are nimble. We're quick We can probably go from meeting someone and getting the project info to produce in a term sheet within one to two days And we can settle within one to two weeks So that that's sort of nimbleness in terms of a quick knows a good know instead of you know Dragging things out. A hundred percent. And if we say yes we'll do what we'll say we'll do. And that provides good kind of certainty.
And that's ultimately what a lot of those borrowers are actually looking for. They want a quick decision so they can get things off the ground and moving fast.
100%. If it's a builder developer, they'll want to be locking in their team and know where to put it in the schedule. And the last thing they want to worry about is knowing whether the funding is going to get to the finish line and fall over, or if it's there and they can worry about things they should be worried about, which is building.
Yeah. I'm probably just, I'm going to wear a black hat for a second. And so, well, there's been a few, you can't miss the newspaper headlines, right? So Sydney, Melbourne in particular, maybe not having some of the same dynamics. Brisbane, cities, Queensland's obviously got an Olympics coming and a few other things like that. So we've seen some property price drops in those southern cities and you know if there's one thing I've learned is prices can keep going up forever. Do you think that's going to have an impact on the market at all in Brisbane or will some of those underlying supply and demand dynamics, population growth, the Olympics etc. maybe insulate Brisbane from some of those from some of those issues down south?
Yeah look I think we're sort of cautiously optimistic in terms of the outlook for Brisbane and in saying that there's markets within markets you know you can talk from very high-end housing to the middle of the ring housing down to townhouses etc. I think It's one of the more insulated states for sure. I think we might have probably 12 months of, you know, sidewards momentum in some markets and a little bit of softening in others, which we alluded to earlier. I think longer term, you know, that supply demand factor is going to be a soft landing for Brisbane and Southeast Queensland compared to some of the other states, in my opinion. particularly resolute would be the sort of, I suppose, one to two million dollars, which is entry level now, right? That used to be... That's a bit of a scary thought, isn't it? Yeah, yeah. It used to be buying a five bed house in the burbs with a pool, but not any longer. So look, we're funding a number of subdivisions now from places like Launton and Joyner down to Calamvale and Algester and all the way out to Fernvale with one of our top clients. And just the take-up of that product is staggering. And touching on the land subdivisions for a moment, there's a lot of, I suppose, builders who come on and snap up that product. And then it'll be sold as a house and land package, will be paid out of the land component, and then the purchases bank will go on to fund construction. I don't see any sort of slowing in that anytime soon. People need to within a certain budget and household wage need to kind of go out a bit further and that's where those houses are and they're pretty much a million bucks now, which is scary. And then again, townhouses. So obviously we've had some changes recently in terms of negative gearing and the like, which has been all over the news and papers.
Will that be positive for new builds, do you think?
100%. I don't think developers have been adversely affected at all by, particularly the ones we're funding, by the recent changes. Because obviously for investors buying a new product, they can still avail of the negative gearing. So if you look at the sort of mix of purchasers of some of the townhouse projects we're funding, it's first home owners, it's investors, and then a little bit of down sizes as well. It could be empty nesters that spend their time traveling a bit and they want just something smaller that they can lock up with low maintenance. And so I think that market will continue to be resolute as will probably the two to $3 million market.
Which is now the sort of the trade up.
Yeah yeah yeah. You're in some of your better suburbs but maybe just not as high spec build as some of the other houses that are being delivered. And if you look at a sort of professional couple now either have a couple of kids or about to you know they want to kind of purchase something between sort of two mil and three mil to be in in those kind of spaces. The stock is very light in that space because the ability for a builder developer to buy the land, build a house and deliver to make a profit. It just doesn't work. So there's then that awkward jump up to the next ring, which we touched on a number of times.
The more prestige
Yeah, three to five. And that's just probably the area which I'm sure long term or medium to long term will have no issues. But if there was one sort of sector of the Brisbane market over the next 12 months, I think there'll be a bit of softening in and that might be five percent, eight percent. It will be that sector, I think, Darren.
Yeah, I think the thing I saw on some stats was that a 5% drop takes Brisbane back six months. So in the scheme of things, it doesn't feel like it's quite as apocalyptic as it's been made out to be.
Well, you know, headlines sell newspapers, as we know, but yeah, if you look at the growth we've had, even if we have a couple of little corrections like that, we're well ahead.
So maybe, to close Gary, your summary of the situation in a couple of short pithy sentences would be?
Yeah, outlook for private debt in South East Queensland. If you're with a non-bank lender like HCP or similar, within the 60 to 70% LVR, as long as you're picking the right sponsors and the right projects, I see a healthy market and continue to form a good part of the portfolio, delivering net returns from 10% to 11%. I don't see a whole lot of downside in it. Again, people need to research each deal on its own merits. As a business, we look at it and we say, stick to our knitting. Let's not try anything bigger, anything different. Boring. Let's keep doing the same.
Sometimes boring is beautiful.
Boring is beautiful. I think the last few years we've done sort of 100 to 150 million dollars worth of lending a year. That's what we want to do next year and the year after. So a lot of businesses want to grow for growth's sake. We want to keep a small, manageable team. deal with good people and keep it simple.
Yeah, well there's an acronym for that Gary, but it's good to hear prudence sometimes pays dividends for sure. So I'd like to thank you very much for your insights today. It's been excellent having you on. Thank you very much.
It's been a pleasure. Thanks, Darren.
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