There are 4 primary types of lenders that operate in the property finance market. These consist of Banks, Non- Banks (otherwise known as finance companies), Private Lenders and Mezzanine Financiers.
This consists of the 5 primary banks in New Zealand (ANZ, BNZ, Westpac, KiwiBank and ASB). These are the primary funders of property development in New Zealand, and provide the most cost effective solution to borrowers.
By virtue of their position in the market, however, they are also the most risk averse lenders and tend to have the highest thresholds to cross to secure finance. They often require significant pre-sales, 30%+ equity and developer experience.
There are many non-banks in the market, both local to New Zealand and based offshore (particularly from Australia). They often take on riskier positions negotiating on equity, pre-sale requirements and experience, amongst other items, filling the void left behind by the main banks in New Zealand.
Non-bank finance is normally provided by virtue of high net worths supported by bank wholesale credit lines.
Private funders tend to consist of high-net- worth (HNW) individuals and can provide greater flexibility than other lenders as they are not governed by finance lines, internal risk policy, or Internal Rate of Return (IRR) hurdles.
Mezzanine finance is a loan that is subordinated to senior debt, and can be considered as quasi equity from a senior funder. Because the debt is at a greater risk of loss (the senior position gets repaid first) there is a much higher cost to this debt (typically 20 – 30%).
Mezzanine finance is normally difficult to secure because of its risky position and expensive nature. Often a minimum level of $500,000.00 of mezzanine finance is sought along with very strong development metrics.
Banks vs. Non-Banks
It is normally 1 of 2 reasons that you would engage with a non-bank lender-either your equity or your exit (pre-sales) aren’t sufficient enough for a main bank.
There can be other reasons that drive that conversation, but the two above are the most frequent.
Whilst non-bank lenders cost more than a traditional bank, the reduced equity and pre-sale requirements can actually result in better financial outcomes for the borrower. It may mean getting your project underway quicker (not having to wait on sales) which can save on holding costs or variations in the build rate.
This can result in a better ‘bang for your buck'.
For more information on lender types, and an example of the financial difference between using a main bank vs a non-bank lender, check out our free Development Finance Guide here.
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