CCCFA, Debt to Income Ratios, Tax Deductibility, Test Rate Floors, LVR Speed Limits and Rising Interest Rates. All topics of conversation in the last 2 – 3 months with commentary around their impact on house prices and ability for people to leverage. Couple that with a pandemic and lockdown, and it has been a turbulent time for a lot of borrowers.
Despite this, we have seen a level of property development and enquiry for development lending like never before. The level of activity in this market has been enormous, with constant enquiry from not just Auckland but Nationwide. Lenders across the board have been filling their boots and I would expect to see record numbers of debt out the door across the last quarter for non-bank lenders. This has been coupled with significant delays (see supply chain issues) and cost increases through the traditional development cycle which has further chewed away at their liquidity.
This has made for some very interesting times. We are seeing a tightening of liquidity across all lenders that seems to be driven by demand for capital as opposed to market risk (albeit that is definitely creeping in – keep an eye out for our upcoming blogs re CCCFA). The feedback is that most lenders are ‘full’ and hitting pause til the new year.
For context, I have had 5+ referrals from lenders over the last month (and anecdotally heard of more) who cannot fund projects they normally would.
As a developer, what does this mean?
Lenders are very simple entities. They lend money out to others at a cost to enable those others to complete an activity. The goal for the lender is to get their money back with a return that is compensatory for the risk they take on. With a market like this, there are three big effects to watch out for;
- A change in risk appetite.
- A change in pricing.
- Longer turnaround times.
In simple terms, when opportunity is lean, a lender will take on greater risk to get their money out the door. When opportunity is abundant, they will take on less risk.
Why less risk? The lower the risk, for the same return, the better likelihood they have at getting their money back on time and in full and therefore the better overall return.
We are in a time where opportunity is abundant and therefore lenders are picking the low hanging fruit. Lenders are sliding down the risk curve. They are requiring greater equity, a better level of pre-sales, stronger counter-parties and better development controls.
Non-Bank lenders are no longer as free-wheeling as they have been, and getting your development into shape has never been more important.
The other metric which has been moving is the pricing on debt. This hasn’t shifted a lot, but I would expect it to move upward steadily over the next 6 – 12 months. As above, when the market is replete with opportunity, lenders can afford to be choosy and demanding on their pricing. They effectively can ration funding for the best return.
Adding fuel to the fire here is their cost of capital. As rates increase, lenders will find that their funds to lend cost them more, and therefore they need to charge more to recoup the same return.
Lenders may not be entirely transparent with this, you could find hidden fees, shorter terms or other levers used to boost pricing. Rest assured, however, I would expect to see the level of return (pricing) demanded to increase as lenders seek to maximise their returns.
Previously, the lead times for an application with a non-bank lender were short. As funds were readily available and risk appetite was more consistent, lenders could turn around approvals quickly and move funds out the door rapidly.
This is changing. Because of the limited appetite in the market, expect there to be some time to get an offer together from a lender, but more so, possibly the need to secure the capital well in advance of it being required.
How can you go about navigating this market?
The simple answer is to engage with a broker and do so early.
We are regularly in touch with most lenders in the market and have a good feel for their appetite, pricing and turnaround times. We specialise in providing advice to developers in how to prepare their development to secure the best funding outcome. The best results for us are where we are engaged early and can work closely with the developer over time, however, we can often help if it becomes urgent by leveraging our funding relationships.
Having said all of this, I do expect the current ‘liquidity crisis’ to be temporary with things returning to more normality in the second quarter of next year.
If you have a project in the pipeline, please don’t hesitate to reach out.
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