The Australian property development landscape is experiencing a seismic shift, and traditional banks are watching from the sidelines as alternative lenders capture an increasing share of the market. Martin Iglesias, Credit Analyst at Highfield Private, has witnessed this transformation firsthand—and he's sounding the alarm for developers who continue to rely solely on major banking institutions.
The Rise of Alternative Finance
"Probably the most significant trend we're seeing is the rise and the proliferation of alternative lenders, which are lenders outside of the main banking system," Iglesias explains. "There are more of those lenders about, and they offer more latitude around the underwriting process than what the big banks would do."
This latitude is proving to be a game-changer for developers. While alternative lenders have existed for years, their recent growth and sophistication have transformed them from niche players into serious competitors to Australia's major banks.
Why Traditional Banks Are Losing Ground
The exodus from traditional banking isn't happening by accident. Iglesias identifies several key factors driving developers toward alternative finance providers, and they all centre on the increasingly restrictive requirements that major banks impose on development projects.
The Pre-Sale Stranglehold
One of the most significant barriers traditional banks create is their insistence on pre-sales commitments. "The banks want you to do an off-the-plan sort of sale marketing programme to buyers before you actually start anything," Iglesias notes. "Pre-sale commitments are expected to cover 100% of the debt for the best terms. It needs to be 100% at least."
This requirement creates a paradox for developers operating in rising markets. "They won't build and hold because they expect the market to grow by, say, 10% per year, and if they sell on day one, they've locked in with the price," Iglesias explains. "Building and input costs go up in the meantime."
For developers with confidence in their market analysis, locking in prices upfront means sacrificing significant upside potential. Alternative lenders recognise this and structure their facilities differently.
Cash Flow Constraints
Traditional banks also impose another critical restriction that hampers developer profitability. "Sometimes the interest is not capitalised. They need to meet interest throughout the term, which is a real cash flow issue for developers, because they don't have cash on hand to meet interest costs basically until they complete the project," Iglesias observes.
Alternative lenders, by contrast, often allow developers to preserve working capital throughout the construction phase. This single feature can mean the difference between a project proceeding or stalling due to cash flow constraints.
The Low-Doc Advantage
Alternative lenders have embraced low-documentation lending for established developers with proven track records. "Many times they'll [provide funding] on a low-doc basis, which means the customer completes a statutory declaration, or an accountant's declaration, stating what their income is," Iglesias explains. "They don't need the actual tax returns to show the income."
This approach dramatically accelerates the approval process and reduces the administrative burden for developers who have demonstrated consistent performance in previous projects.
The Cost-Benefit Calculation
Of course, this flexibility comes at a price. Iglesias is straightforward about the trade-offs: "You're paying a higher interest rate with alternative lenders. This could be 100-200 basis points more expensive than the mainstream banks"
For developers, the calculation becomes whether the additional interest cost is offset by the ability to capture market appreciation, avoid pre-sales that lock in lower prices, and preserve cash flow throughout the development cycle.
In rising markets, this equation often tilts heavily in favour of alternative finance. A developer who secures funding at 9% rather than 6% but captures an additional 10% in price appreciation across 100 units can easily justify the higher cost of capital.
Market Dynamics and Success Stories
The proof of concept for build-and-hold strategies is already well established in the Australian market. Iglesias points to significant success stories that have validated the model: "A lot of developers and people in the property space are looking to do build and hold more so, because there's been some big successes in that area, particularly with one group called Meriton here, which basically owns the residential landscape for residential apartments now, and they're predominately all build and hold."
Meriton's dominance in Australia's apartment market demonstrates the long-term value creation possible when developers retain ownership rather than pre-selling units. Alternative lenders have recognised this and structured their products accordingly.
Implications for the Industry
This shift toward alternative finance has profound implications for Australia's property development sector:
Market share redistribution: As more developers discover the advantages of alternative finance, traditional banks are losing the most profitable development clients—those with strong track records who no longer need to accept restrictive traditional terms.
Project viability: Developments that wouldn't proceed under traditional bank requirements can now move forward, potentially increasing housing supply in markets where it's desperately needed.
Risk concentration: As alternative lenders capture market share, questions arise about their risk management practices and what might happen during a market downturn.
Banking sector response: Major banks may need to reconsider their risk frameworks and product structures to remain competitive in the development finance space.
What This Means for Developers
For property developers navigating today's market, Iglesias's insights suggest a clear strategy: don't limit yourself to traditional banks when exploring financing options.
"I would say the biggest opportunities would be because you can access a wide range of alternative lenders, and they get higher loan-to-value ratios," Iglesias notes. "So you can generally get higher LVRs and more bullish finance terms by approaching them."
However, he cautions that this approach requires careful financial planning. Developers must "adjust their ROI or their return on investment for a higher cost of debt as well. So they should consider what their returns need to be."
The Changing Face of Development Finance
As someone who worked at Australia's major banks before moving to Highfield Private, Iglesias brings a unique perspective to this evolving landscape. His experience on both sides of the equation—traditional banking and alternative finance—provides valuable insight into why this shift is occurring and what it means for the future of property development in Australia.
The message is clear: alternative lenders aren't just a niche option anymore. They've become a primary channel for sophisticated developers who understand their numbers and want financing structures that align with their business models rather than simply fitting into standardised bank products.
For developers willing to pay a premium for flexibility, and for those confident in their ability to capture market appreciation, alternative lenders represent not just an option but often the optimal choice. Traditional banks, meanwhile, face a strategic decision: evolve their products to remain competitive, or accept a diminishing role in one of Australia's most significant asset classes.
The revolution is already underway. The only question is how the rest of the market will respond.
