Building Confidence: A New Phase for Construction Lending

Improving supply dynamics and more predictable delivery timelines reshape the construction lending landscape. Slowing global growth, surplus manufacturing supply from China, and normalised supply chains are easing input costs and reducing delivery risk. For builders, this means flatter cost curves and fewer budget blowouts. Labour availability remains tight, but the severe shortages of 2022–23 have eased, giving contractors more confidence in timelines and margins.

With this more stable backdrop, we’re increasing construction exposure across our funds, from a current base of ~10% to a target range of 20% by year-end. The improved cost environment and greater delivery confidence support more capital to be deployed into well-structured in demand projects. Other key indicators of the shift in the market include:

• Residential construction costs rose just 0.4% in Q1-25, bringing annual growth to 2.9%, the slowest pace since 2010 (CoreLogic Cordell Construction Cost Index). The sector is entering a more stable phase, improving visibility for developers, financiers, and contractors.
• Easing cost inflation is lifting confidence in development budgets. Builders are securing materials and trades on more reliable terms, turning what was recently a schedule-risk premium into an earnings tailwind.
• Inbound enquiries to our commercial real estate team are up ~35% year-on-year, with approximately $750m of new investment opportunities in documentation across Adelaide and Melbourne.
• Our funds currently have no active project breaches relating to construction covenants. This month, we marked the structural top-out of a 37-level mixed-use development in Adelaide’s CBD. The project, comprising 289 apartments and eight levels of commercial space, is now tracking nine weeks ahead of forecast, with strong pre-sales and debt coverage exceeding 100%.
• Delivery momentum is also evident in New Zealand. A premium retirement living project approximately 30km north of Auckland is progressing ahead of plan. Construction began in September 2023, and the latest stage reached practical completion four months ahead of schedule.

​​​​​​​Source: CoreLogic

These dynamics are already flowing through our portfolio. Faster completions are shortening loan durations and releasing capital at a time when spreads remain compelling. This week, our funds received full repayment of a mixed-use project in Adelaide, returning $31.7 million. Originally structured as a land facility in 2020 and converted to construction funding, the loan supported the delivery of 33 apartments, a 72-room hotel, five commercial tenancies, and the restored Hackney Hotel. Following a borrower transition in August 2024 managed by Merricks Capital, the loan was refinanced this week and fully repaid, delivering investors a 13.5% net IRR.