Active lending takes centre stage in NSW construction space

Borrowers looking to mitigate the risks facing the construction industry should turn to lenders that take an active approach to funding deals.

We look at what this approach entails and how brokers can benefit.

Over the last few years, the construction industry has tackled rising builder insolvencies, supply chain disruptions and increasing costs due to inflationary pressures.

During the 2022-2023 financial year, 2213 building companies went into administration, according to ASIC insolvency statistics. As well as impacting consumer confidence, unfinished projects and losses often lead to reputational damage and uncertainty for developers.

At a recent CAFBA Construction Industry event, NSW Building Commissioner, David Chandler praised recent moves to create greater credibility and regulation around builders in the form of iCirt ratings, however, he was quick to point out they will only be effective if lenders pay attention to them and avoid working with unregulated operators.

As well as checking the credentials of builders and other providers, Chandler urged lenders to adopt an active lending approach – including site visits to ensure money is being spent appropriately.

“Active lending means making sure that whoever you’re lending to has the credentials to borrow and ultimately pay your money back,” he said. “Not paying attention to where the money goes can lead to significant losses.”

Active lending is a familiar concept to George Khoury, Director at Assetline Capital, as the non-bank lender has led the way in active lending for a number of years.

One Step Further

For Assetline Capital’s team, active lending means implementing an in-depth due diligence process that involves assessing both the developer and the builder – and it goes beyond reviewing their financials.

“We go one step further and look behind the scenes; who is the site foreman, who is the leading hand, what projects have they done? Are they happy being on the job or are they operating from a place of frustration?” Khoury explains.

Assetline Capital implemented an active lending approach during the COVID-19 pandemic to help mitigate common problems that the construction industry was facing. They’ve continued to adhere to this strict reporting criteria and stringent rules to ensure each project is delivered on time and on budget.

“We’re seeing a range of challenges,” he explains. “Inflationary pressures are increasing the cost to complete a development, the housing affordability crisis is putting pressure on developers to add capacity in areas they might not be familiar with, and there are builders going bust.”

Khoury and his team apply the same process to all their construction deals, regardless of size.

“All construction loans, no matter how big or small, are subject to the same active lending process,” explains Khoury. “It’s about having an aligned focus with the developer and builder for the benefit of the project, making sure that everyone is doing their part and monitoring that.”

Borrower Benefits 

Our active lending process includes site visits to each project on a fortnightly basis. This helps ensure funds are being used appropriately, and more importantly potential issues are identified early – so they can be managed before they spiral into major problems.

This is particularly important in the current environment, with the recently extended Project Intervene led by Chandler which focuses on making builders and developers accountable for building defects.

“Because of our expertise, we’ve been able to have really good conversations with developers when things are tough and work together to get a good outcome,” Khoury explains.

Many of Assetline Capital’s project managers have construction backgrounds, and the team includes registered builders, architects and engineers to provide guidance and support. The focus is on proactive problem-solving.  

“We’re seeing a lot of changes in NSW specifically, with a push for an iCirt rating for buildings and better governance. A significant part of what we do is empowering and educating our borrowers to keep up to date with legislative changes,” says Khoury.

For Assetline Capital, one of the biggest benefits to active lending has been the strong relationships they have built with developers.

“At the core, we do this because we care,” explains Khoury. “We’re looking to genuinely benefit our borrowers and the construction industry. Our project managers don’t just specialise in finance, they have extensive construction experience and that makes a big difference.”

Looking to partner with a lender that promotes active lending? If you have a construction deal you’d like to discuss, please get in touch here.