Category: Blog

Amid a widespread pandemic, the global economy is caught between cushioning the blow of a recession and planning for recovery. The impact on the property finance market will be significant, albeit mitigated by early policy responses from the NZ government and Reserve Bank. Comprehensive post-lockdown data is yet to be reported, and clarity as to what a post-lockdown economy will look like remains elusive. What is clear is that uncertainty will be a key factor in the property market over the next 12 months, and investment decisions need to be tailored accordingly.

Instead of floundering, the key is to look at economic indicators and use them to predict where the property market is going. Now is an optimal time for well-capitalised investors and developers to exploit current market conditions and prime themselves for a future where interest rates refuse to climb, and property prices detach from fundamentals. So, what should property investors do to survive the COVID-19 recession and recover on top?

Forecasting Economic Change & Recession Recovery

Many models of post-COVID recovery have been created assuming that we will be aiming for a “return to normal”, but this cannot be the yardstick we use. Big changes are predicted by financial analysts like Forbes’ Nishan Degnarain and the UK government, as data points continue to reveal potential changes to the “norm” and the adoption of a “new normal”.

A YouGov poll taken in Britain demonstrated that only 9% of people want to return to the ways of pre-COVID life, while the rest want to see changes in how their government approaches issues of the environment, the economy, and civilian aid. If these results are reflected in the wider world, this will mean potentially significant changes to consumer behaviour, altering the hierarchy of different sectors and adjusting the world to a “new norm”.

Factors closer to home must also be taken into account, such as the reduction in domestic travel between regions in New Zealand, decrease in international tourism, volatile ROI rates, job opportunity rates rising or lowering in different areas, and more.

Ultimately, it is important to remember that there are few (if any) facts to predict the future, and that the vast majority of theories about the future are extrapolations from past events. What we are experiencing as a global community has never been seen before, so we need to remain sceptical as to the possible outcomes.

Recovery Models for the Economy

Below are the best- and worst-case scenarios for recession recovery.

An L-shaped recession is the worst-case scenario for recovery, signifying long-term damage to the economy and minimal recovery for quite a few years. Luckily, this recession is unlikely due to governmental responses to the virus and stimulus packages being granted in many countries. However, this pattern is not impossible.

A V-shaped recession is the best-case scenario for a post-COVID world, indicating short but harsh consequences and a quick rebound with minimal long-term damage. This could be the future for New Zealand’s economy thanks to the quick reaction on the part of Jacinda Ardern’s government.

Economists are recommending approaches that benefit from the volatility and uncertain future promises, i.e. employ strategies that enhance returns whether the market shifts up or down. These conditions create an opportunity to protect against downside risk and increase income if the investor refrains from reactionary investment.

What New Zealand’s Economy Means for Property Investment

Forecasting is certainly not foolproof. However, using economic indicators and predictions from the country’s financial institutions can give us a glimpse into the potential future of the property industry.

Economic Indicators and Predictions in New Zealand

According to the New Zealand Treasury:

• Three of New Zealand’s major banks have downgraded their economic forecasts to be more pessimistic than they were, predicting a contraction of close to 20% in the June quarter and unemployment nearing 10% by the end of the year.
• Retail spending in every product (apart from consumables) has taken a sharp downturn in spending because of the lockdown, while unemployment claims from work-ready individuals have soared to nearly 120,000.
• If restrictions ease further in the coming weeks, the Treasury predicts the GDP will rebound in the September quarter (predicted at around 8.5 points of growth by major banks).

The current forecast is an appreciable rebound in September for New Zealand. So, what does the above mean for property investors specifically?

For Property Investors

The likelihood is that New Zealand’s recession will be short but harsh, creating buying opportunities for investors with strong balance sheets. Low interest rates mean that smart, well-capitalised investors can use this time to expand their portfolio and ride the wave upward, but only if they’ve accounted for their other costs in the worst periods of the recession. It is important to remember that availability to credit will likely remain tight over the near term, making early engagement with your funder a must. As it stands, market feedback has indicated that banks are limiting exposure to certain high-risk sectors with funding support limited to existing clientele.  

Our recommendations are as follows:

• Have a clear investment strategy that accounts for positive and negative changes. Be a realist and consistently consult data to determine your next move.
• Manage your risks, don’t over-invest.
• If you’re looking for loans, spread your lenders across bank and non-bank sectors if possible. If you’re not an existing client of a bank, consult a reputable non-bank lender that can help you with your investment strategy.
• Keep your focus on long-term fundamentals, such as low mortgage rates, dwelling shortage in urban cities, and more. (Source: Tony Alexander)

Here’s a shortlist of what we should all be keeping an eye on over the coming months:

• Unemployment
• Mortgage rates
• Migration
• Supply/demand
• Reserve bank policy
• Retail bank credit policy
• Rates of return for all asset classes
• Sales & listing data

Keep up with the latest shifts in property development finance with ASAP Finance

We’re New Zealand’s market-leading non-bank lender for property development finance, and we offer everything from bridging loans to joint venture investments. For more information on our services or to consult us about a hassle-free property loan, get in touch with a lending manager from ASAP Finance today.

The COVID-19 outbreak will continue to cause significant adverse economic effects that will almost inevitably impair borrowers’ abilities to obtain and service mortgages. And unlike the mainstream banks – which can access new NZ Reserve Bank liquidity and funding support – non-bank lenders have a much more restrictive toolset to combat economic shocks.

Billion dollar initiatives to encourage lenders to provide cash flow support to small business have emerged, but they haven’t brought salvation for all sectors of the market. In particular, the Non Bank sector will be feeling pain as wholesale funders and investors reduce their risk appetites and, in some instances, pull funding altogether.

Fortunately, ASAP Finance is a family-owned business and private equity is supported by fixed-term funding lines from mainstream banks. This means we do not rely on wholesale funders or investors which provides us with cashflow certainty. However, there are other sector specific risks which all developers should consider when choosing their funding partner.

On an ongoing basis, development finance companies have an added layer of complexity when it comes to managing cashflow. Development funding requires lenders make progress payments to the developer/ or contractor generally on a monthly basis for completed works.

During the Global Financial Crisis (“GFC”), many developers were caught out when their financier failed to make those progress payments ultimately spelling disaster for their project. This is because development finance companies rely on recycled cashflow from mortgage repayments to fund progress payments.

Mortgage repayments can come from selling down completed stock once the project is complete, or by way of refinance once the construction risk has been eliminated. During times of crisis, low transaction volumes decrease the frequency of repayments, similarly the refinance market experiences a decline in liquidity as other lenders become less willing to take on new debt.

Simple strategies such as switching from loan origination to servicing existing clients can provide immediate cashflow relief during times of crises and could be considered best practice for even the most well capitalised development lenders. The catch-22 being that it decreases overall liquidity in the economy and can ultimately worsen the impact of a crises.

At ASAP Finance we endured the Global Financial Crises and are aware of the perils that can result from being unprepared for external shocks. We emerged strongly from the GFC and the lessoned learned continue to be implemented in the business today including always operating with sufficient margin of safety (we currently have $50 million in undrawn secure funds).

Over the past 2 weeks we have visited over 80 construction sites with more sites to be visited over the coming weeks. Our commitment to our clients during these time remains unchanged; our success is inextricably linked to the success our clients and we look forward to taking each and every project we are involved in, to completion.

The impact of the four-week COVID-19 lockdown imposed by the NZ Government on non-essential services will be far reaching for Kiwi developers. We continue to urge our developers in NZ to focus on ensuring the success of their commercial development projects during these uncertain times.

At a high level, property developers in NZ will be facing increased interest and debt-servicing costs, primarily because of delays to their construction projects. While such delays may erode profit margins, contingencies are built into construction project budgets for this very reason.

Identify Cost-Saving Opportunities for your Projects

Identifying any cost-saving opportunities for your construction development projects will help limit the impact on your bottom line. For example, one of our clients completing a staged land subdivision had included costs for ‘enabling works,’ for the later stages of the project within stage 1. While completing this work was economical when the project was viewed as a four- year development, removing them was a no brainer as it did not prevent the client from obtaining stage 1 titles and would ultimately reduce the debt the client would need to take on in the early stages of the project. Opportunities like this exist within all projects and can be as simple as rethinking the finishing chosen for bathroom and kitchen fitouts

Beware of Third-Party Risks

At a more hands-on level, we are encouraging all our clients to engage with their builders and contractors to manage any risk that may arise because of reliance on a third party.

Limited cashflow will test the financial solvency of main contractors, sub-contractors, and suppliers. Subcontractors—who work on low margins and high cashflow—are likely to be impacted the most.

Analyse who you are contracting with. Are they a large firm likely to have a greater degree of financial resilience? Or a small firm running on day-to-day cashflow? Ensure you have the council inspection records on hand, including producer statements, so there won’t be unnecessary project delays should you need to change contractor.

Review the Supply Chains

We recommend a full review of supply chains to understand what impact COVID-19 will have on access to materials. Be aware that a two-week delay from a supplier in China could result in a one-month delay to your project in New Zealand. Any shortcomings in the supply chain will cause project delays.

For those lucky enough to be in the planning stages, timelines will not be immediately impaired as most architects and designers will have the ability to work from home. However, with such uncertainty over the near-term future, now is a great time to ask yourself whether it’s feasible to move ahead with the project in the current environment.

Make no mistake, the return to normalcy will be slow and it is likely the Government will wind us down the Alert Levels in a staged approach. The extent to which this will continue to impact construction sites—and the broader economy—is unknown. But like most regulation, there will undoubtedly be delays in obtaining compliance, and additional associated costs.

There remains huge uncertainty as to what the working environment will look like post lockdown, and how this will disrupt development finance. But the shining light out of all of this is that demand for new housing appears to remain strong – particularly within the affordable housing category. We expect this sector of the market to remain resilient to any potential downturns and continue to see opportunities for property development projects.

Consult with ASAP Finance for Property Development Funding

As a developer in NZ, your opportunity to add value to your financial project has never been greater. As a leading property finance company in NZ, we know it is our job to support you during these times. Our goal is to help NZ property developers secure the funding they need to make their project a commercial success. Whether you’re planning a residential project or a large commercial build, we can help you get the finances you need. If you would like to discuss your property finance plans, get in touch with ASAP Finance today. Stay home and stay safe!

When attaining development finance, a key but often underestimated consideration for developers is accounting for Development Contributions (DCs). These costs are confirmed by a local council after lodging for Resource Consent. Getting a handle on what these costs will be prior to lodging for resource consent is key to understanding the profitability of your property project.

Furthermore, for land bankers, understanding future DC policy may significantly change your strategy as to how and when you lodge for consent. Below is a breakdown of Development Contributions from the property development perspective.  

What are Development Contributions?

DCs are levies imposed by councils on a developer and are raised as a contribution toward the cost required to upgrade and maintain infrastructure within a designated area. The size of these costs can vary according to the infrastructure requirements of the area, as well as the type and size of the proposed development being carried out (measured by the increased number of residential dwellings or Household Unit Equivalents — HUEs). 

In Auckland, developers looking to complete a subdivision typically incur DC costs of between $27,000 – $33,000 per lot, depending on location and infrastructure demands in the area. This is in addition to paying for private infrastructure works within their subdivision which are funded by the developer and is commonplace in any resource consent. 

In contrast, Levin, governed by the Horowhenua District Council, has no DCs. Instead, all infrastructure costs are effectively subsidised by ratepayers, a strategy which was adopted to incentivise development in the area. 

Why are Development Contributions important?

The purpose of DCs is to recover from developers a fair, equitable, and proportionate part of the total cost of capital expenditure necessary to service growth over the long term. So, the standard approach whereby councils’ charge DCs (as a percentage of total cost) isn’t altogether wrong. But how this is implemented can have a drastic impact on the supply of new sections. 

Simply increasing DCs to a level that fully recovers costs could have serious consequences for home buyers. This is because developers can simply add it onto their section price, pushing house prices further out of reach. 

Councils generally bank on the developer being willing to wear the cost or pass it on to the landowner or the house buyer. But economists have argued with house prices at maximum affordability levels, so developers won’t be able to keep passing these costs on to buyers. Instead, they will be building the cost of DCs into their feasibility studies, causing them to pay less for developable land to maintain their margins. This will result in lower profits for the existing landowners, rather than increased house prices for the final buyers. 

Real-World Implications in Property Finance 

For developers buying bare land, increases to DC levies pose a significant risk. For example, between 2016 to 2017 and 2019 to 2020, development contributions for Rotokauri catchment in Hamilton increased from approximately $30,000 for a standard resident lot, to $70,000—a 130% increase. To put that into context, a small twenty-lot subdivision that would incur DCs of $600,000 in 2016, would cost $1,400,000 today. It is easy to see how this can quickly make any development unfeasible.  

In addition, remember that DCs can rise over the course of a four- or five-year project. For land bankers, understanding current and future policy is key. At ASAP, we accelerated a joint venture development in Hamilton to lock in lower DC’s that were about to be raised by the local council. This made sense, as we were intending on starting works on the subdivision within the five-year time restriction often imposed on resource consents. 

For developers buying unconsented land, our message is clear: build in appropriate allowance for DCs. In addition, always allow for unforeseen increases in cost that may arise due to council changing the DC policy. 

Have experts by your side to navigate development contributions

Reach out to the experts at ASAP Finance today. We’re the leading non-bank lender in Auckland, offering investors access to a property finance company’s financial services with experienced developers on the team.  

From residential development to commercial property, we help with cash flow for all kinds of property investment projects. Talk to one of our lending managers about your next development project today.

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.

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.

The New Zealand Reserve Bank’s long-signaled move to increase capital reserve ratios has in the end proven slightly less severe than some banking sector experts predicted. But it remains unclear what impact the move will have on interest rates.

Ultimately the banks will have to raise around $20 billion to reach the new safety requirements, the Reserve Bank announced in December. But they will now have seven years to do it, not five as originally suggested. And instead of needing to source the new capital solely from equity, they will now need to find roughly $11 billion of equity and can create the remaining $9 billion through issuing preference shares.

There are 26 banks operating in New Zealand, with 14 in the retail market. And it’s no surprise that the bulk of the increased capital demands will fall on the big four Australian-owned banks. The major banks in the sector will have to increase their total capital to 18 per cent, from a minimum of 10.5 per cent now.

But smaller banks such as TSB, Co-operative, Kiwibank, and SBS, will under the new regime require total capital of 16 per cent, which is up from what they hold now but below the larger banks.

What impact will the changes have on banking?

There are differing opinions on what impact the changes will have on the banking and wider financial services sector, what is certain however is that the result will be largely dictated by the response of the big banks.

It is likely that lending will be directed away from sectors where return on equity is low, with the capital requirements diminishing returns in sectors where risk re-pricing is not possible. Highlighted sectors include agriculture, small business lending, and unsecured consumer loans.

Within property lending itself, more emphasis is expected be placed on lower-risk sectors such as residential mortgages, rather than construction lending, which can be a higher risk.

At ASAP Finance we have already witnessed a redirection of borrowing into the non-bank sector, and it is not uncommon for our clients to approach us for development finance for projects which, a year ago would have been exclusively funded by a main bank.

A reduction in the supply of credit and banks holding lower risk-weighted assets has been a determining factor in analysts calls of increased mortgage pricing and decreased interest rates for savers.

The Reserve Bank is estimating that the changes could potentially increase borrowing rates by around 20 basis points – i.e., 0.2 percent. But some of the leading banks have predicted interest rates on mortgages and other loans could rise by more, with ANZ reportedly believing the impact could be up to 60 basis points, while Westpac stated it expected the gap could widen by 40 basis points.

In the lead up to RBNZ’s announcement, upside risks to mortgage interest rates and downside risks to lending painted a picture of low economic growth supporting calls that the RBNZ would need to drastically cut the OCR in 2020. Subsequently, RBNZ’s softer approach has led ANZ to suggest OCR cuts may be less than originally expected.

The next steps

According to Reserve Bank GM for financial stability Geoff Bascand, the bank has listened to the feedback and reviewed all the data and was confident the decision was the right one. The next step in the process will be consultation on a draft of the detailed regulatory requirements during the first half of next year, with the new regime taking effect on 1 July.

“Banks make profits from lending,” says the Reserve Bank. “The competitive market will continue and if one bank pulls back in a particular segment of lending, we expect another will step up.”

Stay up to date with the latest financial news at ASAP finance

As a market leading property finance company in New Zealand, ASAP Finance will keep you up to date on all things finance. If you’re looking for expert financial advice, don’t hesitate to get in touch with our team. Our team can help find solutions to a range of complex funding applications.