Stamford Capital survey reveals “contractor factor” as new lending metric amidst housing affordability crisis

Stamford Capital has released the results of its eighth annual Real Estate Debt Capital Markets Survey, revealing that builders’ reputations have become the new “stop go metric” in development and construction finance. The survey, which included responses from over 100 active lenders, also highlights the rapid adoption and success of NSW’s iCiRT rating system, positioning it as a blueprint for other states to follow in minimising development risk.

The survey results show that 82% of lenders have increased their due diligence, driven by a combination of builder insolvencies and elevated construction costs. Despite these challenges, lending appetite remains strong, with 90% of lenders surveyed planning to increase their loan book. However, heightened due diligence has caused significant delays in loan applications, with Stamford Capital’s historical data revealing a 53% increase in finance application times compared to two years ago.

Peter O’Connor, Managing Director of Stamford Capital, said, “Despite these challenges, lending appetite remains strong for developments with quality builders with plenty of liquidity in the market, while presale and ICR hurdles are moving in an expansive direction.”

The survey also reveals that Australia’s housing crisis is far from over, with a majority of developments in the pipeline aimed at the luxury end of the market rather than delivering affordable new homes. Mr O’Connor noted, “There is a distinct lack of affordable new residential stock coming online. Feasibilities just aren’t stacking up for more affordable developments given high land prices and increased construction costs in our major capitals.”

The survey is the first dataset to examine the impact of NSW’s iCiRT rating system on lending since its introduction in 2022. A third of lenders indicated they take iCiRT ratings into account or plan to in 2024, with 43% of these lenders having rejected a loan due to a poor iCiRT rating.

NSW Building Commissioner David Chandler OAM welcomed the reports of increasing attention to lending risk and development finance governance, stating, “More importantly, consumers are benefiting on many fronts. The growing uptake of iCirt ratings points to developer and builder trustworthiness. The growing presence of LDI and DLI 10-year warranty insurance points to building trustworthiness.”

The survey also reveals that tight profit margins posed by rising construction costs and land values are hindering the delivery of affordable housing stock. Almost half of respondents perceive the elevated cost of construction to be the biggest barrier to affordable housing delivery, with 39% expecting construction costs to increase further in the next 12 months.

Looking ahead, 2024 is set to see an increased appetite to lend, with 90% of lenders surveyed planning to increase their loan book. Non-bank lenders are expected to rise in scale and market share, with 67% of respondents expecting non-banks to increase construction lending, compared to 33% who see major banks stepping up in this space.