Category: Development and Construction
Ride the Property Tide Upward with Development Finance
Property finance in New Zealand has been a difficult market for the past few months owing to the current market conditions. However, there are now 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, 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 this time last year.
The New Zealand Government’s recent announcement of $12 billion in infrastructure projects can also be a positive sign for the broader New Zealand economy. Although most of the funding is earmarked for the likes of roads, rails, 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 upcycle.
How to stay ahead of the property finance curve
There’s just one problem: 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. This is 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 side-line 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.
Why engage with a property finance company?
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, purchasers require a discount to an equivalent product that has been completed. The purchaser’s logic in this instance is that 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.
Connect with an ASAP Finance lending manager to ride the property wave upward.
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 regards 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. Set yourself up for a profitable future with the team at ASAP Finance. Reach out to one of our lending managers today.
Revised optimism for 2020
By the end of 2019 the NZ property market was showing signs of improvement – one needed only to have attended a pre-Christmas auction to notice the stark contrast in mood as previously indifferent buyers appeared now excited and confident to freely ‘bid away’.
The turn in sentiment can be traced back to April 2019 when the coalition government decided to abandon a general capital gains tax as proposed by the TWG. Since April, monthly house sales have risen steadily to be around 13% higher in November 2019; even house sales in Auckland have rebounded 30% to around average levels.
House prices also shifted up a gear, supported by record low interest rates, with Auckland posting seven consecutive monthly increases and fully recouping the prior two years’ worth of losses.
CoreLogic Senior Property Economist, Kelvin Davidson noted recently that the solid economy – especially low unemployment – and favourable mortgage rates were playing a key housing market role too.
At ASAP, much of the above confirms trends we have already seen through the numerous developments funded throughout the course of the year. Demand for well-located and thoughtfully designed properties remains high and clients who have adhered to these simple principles have been able to sell down stock quickly and often above initial price expectations.
Higher density developments such as terraced townhouse projects continue to represent the bulk of our development finance applications at ASAP; not entirely surprising given the high demand we continue to see at the affordable end of the market. In fact, the sector has proved somewhat of a safe haven over the past few years during periods of lacklustre activity at the premium end of the market. With land prices at elevated levels and affordability at the forefront of everyone’s mind, we expect sustained focus on high density projects over the coming year.
Looking ahead to 2020, most major trading banks are estimating rosy conditions to continue with calls for property prices to increase between 5.0-7.0% including ASB and Westpac who both recently revised their estimates upward to 6.5% and 7.0% respectively. What appears to be clear is that the market is being driven by the fundamentals of supply and demand rather than speculators, which was a feature of the last upward cycle.
The Reserve Bank’s decision in December to increase capital reserve ratios, whilst less severe than banking pundits predicted, is anticipated to further tighten credit conditions whilst its decision to leave existing LVR restrictions unchanged should continue to keep a lid on the speculative market.
What remains to be seen is how the coalition government will respond in the build-up to the General Election and whether a new round of ‘regulation’ will give rise to a pause in market activity.