Sharing Risk in Commercial Real Estate
Sharing Risk in Commercial Real Estate
Why Smart Money Shares Risk
Risk flows downhill. Money flows up.
This simple truth has governed commercial real estate financing for decades across Australia and globally. Developers shoulder construction risk, market risk, regulatory risk. Lenders collect fees and interest whilst staying protected by collateral and guarantees.
But something fundamental is shifting in our industry.
The old playbook of shifting risk onto builders alone simply doesn't work in today's interconnected economy.
Smart money is moving toward a risk share ecosystem instead.
The Real Cost of Risk Isolation
Traditional financing structures create what economists call "moral hazard" - perverse incentives that actually increase systemic risk. Lenders minimise their exposure whilst developers and builders absorb maximum risk. Service providers collect fees regardless of project outcomes.
This isolation might feel safer from a balance sheet perspective, but it generates massive inefficiencies that ultimately cost everyone more.
Consider what happens when incentives misalign across the development chain. Lenders focus purely on collateral coverage rather than project viability. Contractors optimise for their margins rather than overall project success. Each party protects their narrow interests whilst the ecosystem suffers.
The result? Higher costs, longer timelines, and reduced innovation across the entire sector.
The Australian Treasury's recent review of security of payment laws reveals a stark reality: construction companies accounted for 26.4% of all Australian corporate insolvencies in 2023-24. This crisis stems largely from fixed-price contracts that transfer virtually all financial risk to builders whilst protecting lenders and developers.
Digital Infrastructure Enables True Ecosystem Finance
What's changed is our ability to coordinate complex risk-sharing arrangements at scale. Modern platforms can track performance across multiple variables, distribute rewards based on actual contributions, and create transparency that traditional structures simply couldn't achieve.
During my time architecting systems for major Australian banks, I saw firsthand how technology could transform risk management. When we built CBA's global foreign exchange platform across Sydney, London, New York, Singapore and Japan, success came from aligning all participants around shared objectives rather than competing interests.
This represents more than operational efficiency - it fundamentally changes how capital flows through development ecosystems.
Forward-thinking financial platforms are demonstrating better approaches. Instead of isolating risk onto individual builders, they create shared accountability across all ecosystem participants.
The Australian Context
Australia's commercial property market faces particular challenges that make ecosystem alignment even more critical.
Australia's commercial property investment reached $23.8 billion in 2023, yet our geographic constraints mean development projects often involve complex stakeholder networks spanning multiple states. The Australian Constructors Association describes the current situation bluntly in their industry analysis: "all risk, no reward" for builders under fixed-price arrangements.
Traditional financing approaches struggle with this complexity, leading to suboptimal capital allocation and increased project risk.
The Reserve Bank's September 2024 Financial Stability Review noted the resilience of banks whilst highlighting ongoing challenges for construction businesses as fixed-price contracts squeeze builder margins amid rising costs. When each participant optimises only for their narrow interests, the entire system becomes more fragile during economic transitions.
What Ecosystem Risk Sharing Looks Like in Practice
Practical implementation varies, but successful models share common characteristics that I've observed across multiple technology implementations:
All stakeholders maintain skin in the game proportional to their influence on outcomes. Information flows transparently across the ecosystem rather than being hoarded by individual parties.
Risk gets distributed based on who can best manage specific components rather than who has the least negotiating power. Returns reflect actual value creation rather than positional advantages in the capital stack.
This creates natural incentives for collaboration over competition. When everyone wins together, the entire ecosystem performs better.
The current system's dysfunction is evident in the data. QBE's 2024 construction outlook confirms that 27.7% of all Australian insolvencies come from construction, with builder vulnerability partly attributed to fixed-price contract arrangements under rising costs.
The Technology Foundation
From a technical architecture perspective, ecosystem alignment requires three core capabilities:
Real-time data integration across all participants to enable transparent decision-making.
Automated performance tracking that ties compensation to measurable outcomes rather than arbitrary milestones.
Dynamic risk distribution mechanisms that can adjust as project conditions change.
These capabilities are now technically feasible at commercial scale. As UNSW research demonstrates, builder bankruptcies are costing Australians significantly due to tightening profit margins and risk exposure under fixed-price contracts. The question isn't whether we can build better systems - it's whether industry participants will embrace them fast enough.
The Competitive Reality
Organisations that master ecosystem alignment will capture disproportionate market share as traditional models prove increasingly inefficient.
For CFOs evaluating financing options, this shift represents both opportunity and risk. Companies that continue relying on traditional isolated risk models will find themselves at increasing disadvantage against competitors leveraging ecosystem approaches.
For commercial mortgage brokers, understanding ecosystem dynamics becomes essential for providing value to clients. The brokers who thrive will be those who can navigate and optimise these more complex but ultimately more efficient structures.
For real estate investors, ecosystem alignment offers access to better risk-adjusted returns by participating in value creation rather than just capital provision.
Current regulatory frameworks, including NSW's building contract requirements and SA's price variation limits, reinforce how fixed-price contracts lock builders into bearing financial risks whilst other participants remain protected.
The Path Forward
Traditional risk isolation served its purpose when information was scarce and technology limited coordination. Those constraints no longer apply.
Success will belong to those who embrace ecosystem thinking over individual profit. The future of finance flows toward risk alignment, not away from it.
At Lendhaus, we're building exactly these kinds of aligned ecosystems - connecting borrowers with global financiers whilst ensuring all participants share in both the risks and rewards of successful outcomes.
The question for industry participants is straightforward: Will you share risk to capture opportunity, or maintain isolation whilst others build the future?
The smart money has already decided.
