Non-bank lenders are throwing down the gauntlet to the traditional banks by stepping into the breach to finance developments as big banks tighten lending.
It comes as apartments held by developers as investments on completion of a project are not being financed by the major lenders, and residual stock not sold at project completion is financed by the major lenders in very small quantities.
This is leaving the developers in a difficult financial position particularly for developers that do not fit the banks' new lending criteria.
Non-bank finance group, Chifley Securities, is seeing unprecedented demand from developers who have been left with unsold apartments and require financing to retain ownership of the property. Chifley has seen financing for this activity, where either developers choose or are forced to retain unsold apartments, rise 25 per cent this year.
Chifley Securities' principal, Joe Morello, said the group have financed a range of developers with unsold stock across the Eastern Seaboard over the last four months "as they simply have been shut off from the tier 1 lenders".
"The stock comprises hundreds of apartments, as well as commercial and retail areas of the developments that are often held by the developers and leased," Mr Morello said.
"Tier 2 and tier 3 lenders have stepped into the breach to finance this residual stock, but the problem is expected to rise as more developments move to completion over the next two years amid the tightened lending conditions."
The push comes as the Reserve Bank and economists have raised concerns about the levels of apartment building, particularly in Sydney and Melbourne.
Mr Morello said Chifley Securities has seen its growth continue in 2017 after posting record levels of loan applications worth $1.1 billion for the 2016 calendar year.
The group currently has more than $800 million in current loan applications for projects, with loans ranging in size from $5 million to $60 million in first mortgages, land banking, and construction finance.
The Chifley Securities group is targeting lending of $1.5 billion in 2017 for commercial and residential property projects in cities and regional centres across the Eastern Seaboard, with the majority being undertaken in western Sydney.
Last month, real estate investment management firm Qualitas raised $500 million of institutional capital for the first fund of a multi-billion dollar construction finance programme that will provide loans of up to $125 million for residential and commercial development projects.
The closed-end fund is a core part of Qualitas' rapidly expanding real estate debt strategy that fills a gap created by a pull-back in bank lending. The new fund will provide capital at a loan-to-value ratio of up to 75 per cent for projects that meet its robust risk assessment criteria.
The group managing director of Qualitas, Andrew Schwartz, said investors were stepping in to provide fresh capital to the development sector at a time when banks are reducing their lending activities.
"As both a lender, and an equity provider, we understand the challenges of the development process as well as the factors that make it successful," Mr Schwartz said.
"Our approach is focused on finding quality projects that make sense for the market conditions, are focused on the end-occupier and have a robust risk management approach."