RBNZ recently published the results of a Survey of each major bank in NZ and their outlook for the remainder of 2020. The survey took place in June and had some really interesting findings. I have surmised below a couple of the points surrounding SME and Property Lending and what it might mean for you.
SME Lending (Annual Turnover < $50M).
In short, this is going to get hard. The banks are expecting that there will be a significant drop in demand for Capital Expenditure based borrowing. Think of this as acquisitions and Plant & Equipment, Acquisition of businesses and other investment into business. Effectively it reads like businesses hunkering down and riding out the storm.
They also anticipate a pick up or continued demand for working capital lending signalling difficulty in businesses managing their cash flows through the next 6+ months.
They commented on a ‘modest tightening of credit availability’ loosely translating to the credit assessment process at banks being more robust and difficult to manage. They see heightened risk in the market and see this underpinning margin pressure (interest rates going up) for lending into this sector. This rings true with the article I wrote a few weeks ago around Risk Based Pricing and why we aren’t seeing interest rates align with residential lending in property and commercial lending.
Perhaps the most concerning comment from the article was ‘Banks expect many businesses will resize to match the new level of demand, but some SME’s will fail.’. Reading between the lines here suggests redundancies on the horizon and some insolvencies in the near future.
What this means for Small business owners?
Retain a strong relationship with your current bank. Front foot any discussion around business performance, covenant breaches or credit requirements. Expect your pricing to remain steady if not rise.
On a positive note, if you are well capitalised and looking for growth, there will be opportunity. Keep in touch with your bank and let them know that you might be looking at that, you never know where that opportunity might come from!
I spoke about this in a recent blog. I have seeing a real tightening in this space over the last 5+ years, none more so than the most recent 3 months post Covid 19 and the nationwide lockdown. Data and the end of the report suggests a fall in demand for credit of c55%.
The RBNZ article comments that the banks are ‘generally more cautious’ and have reduced their appetite for investment lending. The primary driver for all of this is concern around tenant covenants. The report makes a mention to ‘higher LVR standards being applied to various sectors’ translating to a much lower demand to leverage certain assets. Anecdotally I am aware some banks are eschewing the standard 65% LVR’s and rather taking up internal policies at 60%.
It also makes mention that there has been and will continue to be a focus on increasing margin on this lending. The banks noted a downgrading of their property portfolios which will correspond with an increase in capital allocation requirements. This in simple terms means the banks see a more significant risk of defaults and losses in this sector prompting them to hold greater capital in reserve to manage.
There remains some appetite at the banks albeit on a more cautious scale with a heavy focus on strong tenants and industries.
What does this mean for Commercial Property Investment?
Per my recent blog, if you have existing investment lending that is coming due at your bank make sure you open a dialogue with them early. Comment on your leases and strength of your tenants. If you get the option to renew lease terms early it could be worth considering to do so.
If you are looking for opportunity it will come. There are likely to be property owners that will be seeking sale and assets that may be undervalued or underrented due to rent relief given to tenants. Be patient and look for the right opportunity. Make sure you do striong DD on the properties you are looking at including what finance might be available.
This commentary is found under the same heading as investment property and follows much the same lines. The banks are seeing further caution and reduced appetite for development lending. They expect to see market confidence fall and trouble developers selling assets off plan.
The report notes that demand remains strong in the Auckland Market for pre-sales however and I am aware of good assets continuing to sell well.
Overall there is going to be a great reduction in lending across this sector over the next 6+ months. The report has some data at the end which reads an expected fall in demand for development lending of 80% and credit margin to increase 25%+. They expect a tightening of lending policies across the board ranging from 15 – 35%.
What does this mean for property developers?
To secure bank finance you are going to have very conservative lending metrics with strong pre-sale cover, strong equity and a good project team. It may mean however that you need to consider other options for finance, refer to a recent blog of mine that comments on Non-Bank Lending in the Development Space and options that affords.
You also need to take some consideration as to why the banks have taken the position they have. Look forward and consider if you want to develop without pre-sales, the assets your developing or how stretchy you want that. There is risk in the market and you want to make sure that you avoid overexposing yourself to that.
As always, if you have any questions on the above or just want to chat around your finance please get in touch.