There are signs of renewed life in the New Zealand property market, with Auckland house prices rebounding quite strongly in the last quarter and average values now back above $1 million to $1.047 million, according to CoreLogic.
There is no doubt that buyer sentiment has strongly shifted, with attendance at open homes / auctions and auction clearance rates significantly higher than the same time last year.
The New Zealand Government’s recent announcement of $12 billion in infrastructure projects can also be seen as a positive sign for the broader New Zealand economy. Although most of the funding is earmarked for the likes of roads, rail and hospitals, in the longer term it seems likely to create better serviced regions and cities. The message for developers is clear – don’t be left behind on the next up cycle.
For most developers, borrowing from retail banks remains extremely challenging.
So what is a developer to do? While most developers are aware of funding solutions available from finance companies, many remain reluctant to use them, either because they haven’t directly dealt with them before or because they perceive them as being too expensive.
ASAP Finance’s experience from the last upswing in property prices was that developers who stood on the sideline hoping for banks credit policy to ease in their favour ultimately missed out on early cycle gains.
Others who took the step of approaching a property finance company were pleasantly surprised at the ease and benefit of doing business. In our experience, they tended to maintain and build long-term relationships with their finance company, even after their bank resumed lending to them. They made the decision to “dual bank” giving them maximum flexibility in sourcing project funding.
In a rising market one of the key benefits of dealing with a finance company is either low or nil level of presales. This benefit is not always well understood by developers. Typically, with presales, purchaser require a discount to an equivalent product that has been completed. The purchaser’s logic in this instance is that they there is inherent risk in not knowing what the quality and timing of the final product will be.
For a skilled developer who has a firm grasp on their target market, there are opportunities to increase profitability by completing the development prior to selling. Not only do they get the benefit of not having to discount their product, but they also get to capture the increase in property values in the 6-18 months that it typically takes to build and deliver the final product. The increased revenue easily offsets the additional financing cost of dealing with a non-bank lender.
Couple this with not having to worry about obtaining valuations or QS reports to facilitate bank drawdowns, it is no surprise that developers choose to engage with finance companies once these benefits are fully understood.
However, developers need to be careful when partnering with a finance company. There are a wide variety of non-bank lenders in the market with the most prominent providers being managed funds and solicitor nominee trust accounts who raise funds externally. Such funding models often rely on a detailed (restrictive) credit policy to protect investors. This can lead to decision being made based on ‘internal credit policy’ as opposed to commercial merits.
At ASAP, our funding is secured by way of private equity in addition to mainstream funding lines. Our private funding allows for greater flexibility and autonomy in regard to lending decisions. This is essential for development finance
For savvy developers, finance companies can accelerate development time frames and unlock valuable equity that can be redeployed toward other projects, amplifying returns.
Written by Ben Friedlander