Finance Market Update - 26 March 21
A lot of businesses are busier than ever and there are a few key factors to that. In this fortnights update we talk about why it is a great time to be in business and how property development is becoming faster and easier.
Now is a great time to be in business and most businesses are busier than ever.
One year on from lock downs and this year, the twenty first year of the twenty first century, is shaping up to be one of the best in a long time for business.
As predicted in the 2020 yearly wrap up almost all economic indicators are will point to a strong recovery from the virus recession.
There are a few reasons for this.
Historically low cost to borrow for businesses, strong consumer sentiment to buy products and services and lots of upside opportunity in the short to medium term.
Let’s unpack those elements.
First are low rates.
Record low interest rates have created an unparalleled funding climate of affordable and ‘cheap’ money for lenders to borrow to lend to businesses.
Worth point out that banks and lenders borrow money to lend money, and the cheaper it is for them to borrow the cheaper it is for a business to borrow.
This is a key factor in the reserve bank’s recent initiatives, not just keeping the cash rate low, but buying bonds in the markets as part of the ‘quantitative easing’ program which is essentially the reserve bank buying bonds at below market rates to artificially keep funding costs low for banks, and therefore businesses.
This has created fierce competition right across the industry from big banks to small banks to fintechs and non-banks to get money out the door and into the hands of (good) borrowers and businesses.
One of the key considerations actually comes down to timing more than cost as banks can take an extraordinarily long time to approve a sizable business loan, compared to days or even hours from more nimble lenders like fintechs, but speed comes at a cost as their rates are much higher.
High rates to get money now rather than in three months can make or break a business though.
Second we have strong consumer sentiment.
We talked about in an update last September about how “the housing market is recovering and will likely lead the economic recovery” which was saying that as property prices rise so will consumer confidence and sentiment, and that property prices were surely going to rise even though this was not a common view at the time.
Generally speaking, the largest piece of people’s wealth is their home. Their castle. So as property prices rise, like a rising tide, they feel richer and when people feel richer they tend to spend more on goods and services.
When people spend more on those goods and services that money is income for a business and another person, who in turn now has more money than before and goes to spend it on different goods and services. This is a basic economic flow of money and income but simply demonstrates a crucial thing.
One person’s spending is another person’s income.
That is a core tenet of what the government and reserve bank have been trying to achieve, getting people to spend more. As an example, just look at the recent restaurant vouchers available to people in NSW. They know the more people spend the likelihood of economic recovery is improved.
While JobKeeper ends next week, we said before the cliff is nothing to be feared. The slow tapering off from this emergency employment subsidy is critical and while it is sad some people will be effected by loss of income, the majority of who are willing and able to work again are working again, so the jobs were kept, just as that payment was intended to achieve.
Third we have opportunity in the short to medium term.
From a macro perspective, Australia is uniquely positioned to benefit from being the major liberal democratic western cultured advanced economy in Asia.
Asia is the fastest growing region in the world, and we have front row tickets.
One terrifying geo-political and macro possibility is that could destabilise everything is a high chance of China attacking Taiwan which could trigger a regional or global kinetic conflict. This would destroy any economic recovery and potential prosperity.
But locally, the situation is currently looking bright and means that there is plenty of opportunity for businesses in the future. Of course, industries like tourism, education and hospitality still need time to recalibrate to the ‘new normal’ after the virus crisis but for the most part things are looking good across the economy.
We also have early economic indicators of a sharp and strong economic rebound, such as the drop in the jobless rate. In an update in December last year I pitched the idea that most economic indicators would point to a sharp recovery and paint a very positive picture and this idea has been validated by recent official figures.
The important point here is that Australia will continue to be the lucky country.
However, we cannot overlook the fact that many businesses and their owners suffered during and from the virus crisis and are still struggling or not even open anymore, but for the most part, most businesses are busier than ever.
Australians have loved and been addicted to property forever, but a new past time is emerging, property development.
Historically property development was reserved for big time developers and institutional money, but more and more people are finding it easier to do a project, and there are a few key reasons why. Profit and easier money.
It is becoming a new hobby of sorts for many would be developers.
The potential profits are high, risk is fairly reasonable considering you are betting on property prices continuing to rise which is looking highly likely.
And the types of lenders that will give debt for projects has evolved and expanded considerably.
In terms of profits from property development a reasonable benchmark to aim for is 30%+ gross profit. This is after total purchase costs of the land, development applications, government costs such as legal reviews and valuations. Construction costs on top then selling costs on the way out.
If you can buy a block of land and subdivide it or build two duplex houses on there chances are you will make a buck.
Roughly speaking, if property prices rise and you build property the value of that property will also rise. Rising property values lower risk (to an extent) and improve chances of higher profits.
Another factor is that people are working from home more often and the demand for houses is intense. The office might be dead for now but people will always want a house.
The profits and apparent ease have led many amateur property developers to have a go but there are substantial risks involved and often people run into issues.
Besides potential profit the barriers to entry to do projects have been lowered.
Back in the day it was big banks or expensive private lenders that were the only options, but with an evolution of the funding supply chain and an explosion in liquidity and money seeking yield has birthed a wide range of lenders specialising in short term property backed projects.
The rise in the number of non-bank and private lenders throwing money into developments is amazing and there are many relative new firms with experience and capital ready to put into projects.
Unfortunately, there are bad apples in the market, so it is extremely important you work with a reputable lender or broker like Skyward Financial before signing contracts.
One of the most common points of discussion on property developers is the cost and pros and cons of getting funding from a bank vs a non-bank lender.
For example, you might look at the rate from a bank of four percent and the non-bank lender might be double that and assume the bank is the better option. However, a bank might take five months to approve the loan whereas a non-bank lender can approve it in weeks.
That difference in time has a considerable impact on the return on investment of a property development.
If you can get funding half a year earlier that means you can finish a project and sell the stock half a year earlier, that means you reach profitability faster.
Further, while the headline rate might appear cheaper banks are more risk conscious and to cover their risk might demand pre-sales. That is, you need to sell stock off the plan to cover part of the debt amount they are lending you. The issue with that is you might sell the stock at a twenty percent discount which ultimately lowers your return on investment and overall project profitability.
There are also other fees and costs such as establishment fees and line fees which need to be taken into account.
The reality is that the majority of commercial property development deals are currently being funding by non-bank lenders, and for good reason.
If you are considering property development Let’s Talk.