Working with the Banks on a daily basis, its easy to understand why tech savvy entrepreneurs are competing for their market share.
Innovation like PayPals venture into the small business loans sector, will force our banks to become more competitive and accommodating when dealing with SME’s who continue to be forced to meet ridiculous hurdles when trying to access capital.

Although our Banks would argue otherwise, in my opinion, other than continuing to channel huge amounts of dollars into property, our banks have played a very small role in helping SME’s grow during the post GFC years and the economic recovery in general.

If you were to look deeper into lending in Australia, you will see that most of the lending that does occur to businesses is supported by the security of Real Property. Banks have effectively homogenised lending to the lowest common denominator with very little room for negotiation when it comes to products, pricing or terms and they almost always rely on Real Property Security as a substitute to critical credit analysis ie. Where a lender would set pricing according to risk (pricing for risk).

This standardised form of lending has ensured that the Banks can continue to operate with the lowest cost base generating the highest returns.

Of course this has been great windfall for shareholders but at what cost to the real economy? Our property market is one of the most expensive in the world, we have one of the highest costs of living and yet our economy lacks efficiency and productivity has deteriorated dramatically during the past decade.

These imbalances are very obvious and have all been contributed to by the fact that capital in Australia is not channeled into the most productive areas where it will achieve the maximum return.

Banks play a critical role in our economy. We need them to be profitable and well capitalised but whilst they continue to remain protected from competition, remain “to big to fail” and continue to rely on government guarantees underwritten by our tax dollars, they should be forced to make a greater contribution to the growth and success of our economy or, to put it another way, should not be allowed to conduct their business in a way the that kills productivity and put into jeopardy the hopes and dreams of future generations.

The Interest Rate Conundrum

RBA reduces rates causing real interest rates to increase Australian Bank Funding Costs Surging . I warned this could occur in WE SHOULD THANK THE RBA FOR HIGHER INTEREST RATES . What’s concerning is how quickly rates have surged and what impact expected, future interest rates decreases may have on Bank costs. If this trend continues, we will see our Banks retain either part or all of any future RBA rate decreases.    


Recently I had a discussion with a broker who specialises in construction funding and he advised me of some of the problems he was having placing several of his construction loans.

After listening to his complaints, I found myself questioning his experience; as it contradicted my own experiences of the past 5 years post the GFC.
As many of you would be aware, we at Folio Finance are very active in raising loans for construction particularly in the transaction sizes of $5m-$20m and have been from our inception back in 2005. During this time we have funded over $300m in projects, with the majority in and around the South East of Melbourne, CBD and Bayside Melbourne.

So what has changed during this time?

Below I discuss the major areas that need to be addressed when applying for construction loans and provide you with examples of how things may have been done pre GFC and what has changed since. I’m hoping this will clarify some of the misconceptions out in the market regarding project funding/construction funding.
Note, the examples and advice below are specific to Bank finance and not loans from Private Lenders or Non-Bank Lenders.

1. Lending Ratios & LVR’s – Whilst Banks (and some brokers alike) may talk about a Loan as a percentage of ‘End Value’ (when discussing loans for construction), lending for development has ALWAYS been provided on a Loan to Development Cost Basis. Banks and Brokers tend to talk “End Value” as it is an easier concept to grasp, but in reality, Banks always lend the lower of a percentage of costs (i.e. 80% of Costs) or a percentage of the Net Realisation Value (NRV ie.65% of NRV). A simple way of looking at this, is that for every dollar of agreed Project Costs the Bank is willing to lend you a fixed percentage. This ensures that the Developer has an adequate amount of equity throughout the project cycle and not only once the Construction is completed and majority of risk reduced. I can’t tell you how many times I have had developers come to my office and advise me that they have millions of dollars in equity in their project, based on the end value of the finished product (not a good sign).
Some lenders did change their Lending Ratios post GFC, in particular WBC, CBA and NAB, but there were many others who didn’t and continued to offer construction loans in Australia, at an “80% of Costs” level.

* NRV i.e. Gross Sales Less GST and Agent’s Commissions

2. Presales – Construction Loans in Australia have always required pre sales for larger Commercial Projects, when the project sponsor lacked the capacity to service the proposed debt, from external cash flow.
Pre GFC, many banks were proceeding with transactions based on pre sales of 50% of debt coverage.
Post GFC, this condition was tightened to 100%.
More recently, some Banks have relaxed this condition back to 50% pre sale cover providing a strong signal that Banks are once again, very willing and keen to fund residential and commercial construction loans.

3. Developer Experience. You can’t buy experience and as such, the most desirable developments to fund (for Banks) are those that are supported by experienced Property Developers. Its experienced Developers who are able to make decisions quickly, on site, ensuring the project is completed on time and on budget. A project Folio Finance recently funded, was completed 4 months in advance and saved the client over $400k in interest on their 1st and 2nd mortgages. It was a highly profitable project and I attribute this to the experience and expertise of the Project Sponsor. His experience meant that he was personally able to project manage the development and quickly and efficiently sort out many of the issues that appeared during construction. Conversely, at a similar time, we assisted a Developer who had years of building experience, as well as a solid level of property development experience (in building Townhouses), who required assistance with construction finance to assist with his first apartment property development. Despite his building experience, his lack of property development experience (of a similar nature) resulted in the project incurring heavy delays and the project timeline blowing out over 9 months. Ironically the Bank had forced the Developer to extend out his sunset clauses on his presold apartments (which the Developer strongly contested, as he was adamant he could complete the project within his estimated timeframe) and this meant that none of the buyers were able to cancel their contracts, due to his delays.
A developer’s Balance Sheet will also go a long way in validating a Property Developers previous success and its highly unlikely that Bank would be willing to lend a Developer , tens of millions of dollars, if they don’t have a healthy balance sheet (would you ?).

4. Financial Statements of the Borrower – we receive many enquiries from Developers who claim that they don’t have, or are unable to provide financial statements. The assumption they make is that their weak financial statements will render them inadequate to attain funding from a Bank. THIS IS COMPLETELY WRONG. Construction loans should be structured on a “stand-alone” basis with the Cash Flow or Debt Repayment generated from the sale of the end product and NOT the sponsor’s historical financial statements (unless the Developers Strategy is to build & retain). There are very few Developers or Developments that are funded on the strength of the sponsor’s cash flow (in the market segment I work in anyway being <$20m in value) which is why pre sales are so important. Recently we had a 6 x apartment development approved for a Developer who had a taxable income of $8k in 2012. 5 of the 6 apartments had been presold which meant that the Banks could be repaid in full on completion of the project. This, along with scoring strongly in areas 1 – 3 above, meant the funding was approved through a Big 4 Bank at very competitive rates,

So taking the above into account, my assessment of the current market for Construction Finance in Australia for Projects of <$20m in value is:

1. The market is more Dynamic post GFC and despite the policies of some Banks changing during this time, funding has continued to be available at traditional LVR’s,
2. Brokers need to control the application process by organising their own valuations and other supporting reports, and ensure that their Credit Submissions are detailed enough to allow an application with a number of lenders at one time. During the past 5 years Brokers and Developer’s who have been willing to work with a number of Lenders would have experienced little to no change in the level of funding they could access for construction loans,
3. Projects that have the right fundamentals are always highly sought after by Banks and Lenders in general,
4. Anecdotally, I believe a high majority of projects that are not funded or declined by the banks, simply don’t qualify for Bank funding and wouldn’t have qualified even in friendlier times,
5. The biggest impact in changes in Construction Lending, have been at the lower end of the markets (i.e. small townhouse development ) where Developers became accustomed to raising construction finance, based on the projects End Value and had little to no equity in the project. This type of funding where the majority of risk was transferred from the Developer to the Lender was unsustainable and whilst it was a great form of finance for Developers, was always expected to be tightened up,
6. The market for Construction Finance is not nearly as bad or tough as people make out and Banks and Non Banks alike, have shown a strong interest to work in this space in 2013,

I welcome your comments and opinions on your own experiences, even if they contradict my own.

Con Katsiouras – Director Folio Finance Pty Ltd


The USA, is the centre of the investment Universe and what happens in the USA dictates the mode and tempo for markets all around the world. So it is impossible for a Global Recovery to occur if it does not include a recovery in Confidence, Growth and Economic Fundamentals in the USA. As far as a resurgence in Finance and Liquidity in Debt markets, the “buck” starts and stops in the USA.

So reading yesterday in Bloomberg news that the pursuit of higher yields by investors is leading to resurgence in demand for Commercial Real Estate Collateralised Debt Obligations (CRE CDO’s) (www.bloom.bg/W3abzb) got me thinking that the markets may have finally bottomed and we could be moving into the next phase of economic cycle –  growth lead by confidence and new investment (as opposed to Government funded GDP).

CDOs are packaged pools of debt that are rated and then sold to investors as Bonds. Assuming the borrowers behind the debt continue to repay their debts (i.e. a high majority of the individual loans forming part of the original pool of funds is repaid), investors receive a regular coupon on their investment (see http://tinyurl.com/d7tz6fr for more information re CDO’s)

CDO’s lost their appeal in 2007 when the Sub Prime crises caused many of the CDO’s at the time to be written down, leading to Billions of dollars in losses for investors all around the world.  

Of course, a large part of the problem up to 2007 was that Credit Agencies were not adequately assessing and rating the risk associated with these investments. This resulted in an inflated amount of demand for these products, due to their perceived lower risk, high return profile. At its peak in 2006, over $520b worth of CDO’s were written alone and the sector became heavily reliant on this form of funding.

However, since 2007, the market has been defined by a low risk and much more conservative investor. This has led to many investors accepting very little and sometimes zero return on their capital whilst waiting for confidence, in a post GFC world, to rebuild. Of course, during this period, their has been very little interest and investment in CDO’s due to the stigma attached to this form of security.  

It has taken a good part of 5 years but recently we are seeing “green shoots” appear in the Global Debt Markets, with more and more investment gravitating towards property secured debt instruments. In fact, many of our Banks have begun refinancing large tranches of their loan books, previously backed by Government Guarantees, with lower cost funding now available on the Global Markets  ( http://tinyurl.com/b6l4byt ), a clear sign that demand for this type of product is improving.

Continued demand for Property related Securities should lead to a decrease in the cost of funds for our Lending Institutions. This will encourage Non-Bank Lenders to once again enter and compete in our local market and increase competition for our over dominant four Major Banks. Competition, particularly in the Commercial Property space, has been almost non-existent since the GFC with the Four Major Banks continuing to overcharge customers (in real terms, margins charged by the Major Banks on Commercial Loan are on average, double their pre GFC levels but disguised by the current low interest rates (See http://conkatsiouras.wordpress.com/2012/07/30/beware-of-banks-bearing-gifts/ ) without any major concern of losing market share, due, predominately to the lack of real competition.

Its competition in any market, that ensures continued innovation between competitors and guarantees that borrowers have access to the most competitive forms of funding, at the best price.

Unfortunately, borrowers, investors and SME’s today have only limited options as far as Commercial Finance goes and this, along with the current tight restrictions on Credit, are a major road block to a return in confidence, investment and sustainable growth, by Australian Business owners.

Hopefully the recent improvements and “Green Shoots” in Global Credit Markets will continue and result in resurgence in Competition, Products, Policies and overall conditions for Commercial Borrowers in 2013. I for one am optimistic that this is a positive sign of things to come.


Con Katsiouras

Director – Folio Finance

Ph: 03 88445555

e: con@foliofinance.com.au


Recently we have seen an almost unprecedented amount of activity in sales involving Service Stations, with $100m’s worth of Petrol Station Sites going under the hammer. More recently it was Woolworths who sold 8 of its Petrol Station Sites http://tinyurl.com/9qyd64e, although prior to this, it was 7 Eleven who sold many of the sites acquired during their purchase of 295 Caltex Service Stations in 2010.

With all the volatility seen in Global Markets spilling over into most asset classes, investors have been desperate for long term, stable yield. The long leases on offer by these Service Stations, underpinned by the strong Retail Brands of 7 Eleven and Woolworths, seem to have hit the mark with these investors and pushed some of the yields down below 6%.

However, there are inherent environmental risks involved with purchasing Petrol Station sites that you need to be aware of and Banks are reluctant to take on these assets, as they could potentially create an environmental issue down the track.

In simple terms, if their is an environmental problem created from the Petrol Station, through a leaking underground petrol tank, or other means, it is you, the owner, that could be liable and become the target of any civil action . Of course, their can be huge costs involved with civil litigation, not to mention the costs involved with remediating a contaminated site, which is why Banks will go to great lengths, to ensure that i) the site isn’t contaminated when taking it on as a security & ii) that adequate monitoring is in place to ensure any future leaks or issues are detected early on.

As such the Bank will request an Environment Audit to be completed by one of their approved Auditors prior to approving a “high risk” asset as security.

The first stage of surveying will almost always entail an Environmental Audit, by way of a Phase 1 report. This report is an investigative report that examines the likely-hood of contamination on a site and the likely causes. Of course, with a service station, the likely-hood of contamination due to its use, is considered high, so the conclusion of the report will ALWAYS recommend a Phase 2 report, which involves a higher level of testing to be conducted (why they don’t simply instruct a Phase 2 report from the offset is anyone’s guess, but the fees involved with creating the reports may have something to do with it).  The costs of these two reports alone can be as high as $50,000 and dependant on the findings of the reports, further sampling, research, drilling and reporting may be required. These tests, along with any of recommendations made by the audit, could add considerable costs to your purchase, literally in the $100,000’s!

So how did all the recent purchasers deal with their Banks? My gut feel is that the majority of recent sales have been completed by Professional Investors with substantial Cash Savings who didnt require assistance from a Bank or Lender.

Personally I do believe that some petrol station sites make great investments, due to their long lease profiles, as well as many benefiting from Mixed or Residential Zoning, which means many of the properties benefit from strategic/long term development potential.

But before you go out and add a petrol station to your property portfolio, do your research. Speak to your lender or Commercial Broker and ensure that you understand all the risks involved with making such a purchase. After reviewing the risks, if you do decide to proceed with a purchase, ensure that you discuss your purchase with a lender, so that you understand their expectations and what will be required to have their support and provide the funding that you require.

Con Katsiouras

Director – Folio Finance Pty Ltd

Ph: 03 8844 5555

E: con@foliofinance.com.au


Like in Business, first impressions are very important when applying for Commercial Property Finance.

Many borrowers come to visit me for the first time only after they have unsuccessfully applied for finance on their own. This instantly creates negative sentiment around their proposal as no lenders like to take on business that their competitors have already declined.

Commercial Finance is a complex and highly specialised with many factors influencing a loan approval. For instance, many times we find that clients are trying to negotiate a loan with a Bank that simply doesn’t have the appetite for their proposition despite the strength of their proposal. For instance, during the first few years of the GFC, many borrowers were making applications with the Four Major Banks for Commercial Property Finance and Residential Construction Finance. This was during a time when the Majors were reducing their exposure to these areas and only rationing capital in that space. Many borrowers were not always advised of this and spent months literally queuing up, waiting for a response from their Lenders which in most cases was NO.

There is not always a “one size fits all” solution to your needs. Dealing with Banks, Non Banks, Property Trusts and Private Lenders on a daily basis, most Brokers will have a strong understanding of the level of appetite in the market for your proposition.

It’s vital that you get your application right the first time and that it’s presented in the best possible way. In many cases this will result in having two or more funders, bidding for your business, ensuring that you attain the most efficient and competitive form of Commercial Finance available in the market at that point in time.

Should you wish to discuss any aspect of this post or any matter in general, please contact me or email me on the details below.


Con Katsiouras – Director

Ph: 0388445555   e: con@foliofinance.com.au