“The tide has turned” – A commercial lending update August 2023

31st Jul 2023 | Liam Wick


Property Markets

If I cast my mind back to Q4 of 2021 we were in very different times. Property prices were somehow continuing to soar, houses were selling off the plan and the OCR was only just beginning to rise for the first time since July 2014.

Developers had contracted land and by the time they were ready to develop it had seen an uplift in value of 10%-20% (or more!) which meant their equity requirement was often satisfied without any further input needed. Feasibilities generally stacked up and projects were easily fundable. For property developers, their biggest concerns were the Covid induced supply chain issues and finishing their projects without lengthy delays.

Debt Markets

As a commercial broker our biggest concern was finding someone who had money to lend. With a record number of consents and considerable delays there was a liquidity crisis in the non-bank market.

I vividly remember reaching out to lenders in October/November and getting feedback such as “Hi Liam, thanks for sending this through. Looks like a good deal but unfortunately, we are fully lent for the rest of the year” or something such as “we are unable to fund this right now however we have a large repayment due in 2 ½ months’ time if the client is willing to wait”.

This forced us to search far and wide for every deal as opposed to only placing it with an appropriate few. It was the lenders who had all the negotiating power as they were able to pick and choose the best deal of the 5+ that came across their desk that day. We were often served with an abrupt response of “this one’s not for us, thanks” which can be disheartening when you have spent the day or more writing a 10+ page credit proposal.

In the office, we longed for the day where the shoe was on the other foot, and lenders were calling us up looking for deals. Cue 2023….

So, what does this mean for borrowers?

In simple terms, when opportunity is lean, a lender will take on greater risk to get their money out the door. Lenders are being forced to ease their key funding metrics being LVR, LCR, Pre-sale coverage and margin - please refer to our Development Finance Glossary for more details.

What we are seeing in the market is that there is opportunity to play lenders off each other and negotiate terms not seen 6-18 months ago.

Case study 1

We recently had an offer through a non-bank lender at 65% LVR with no pre-sale requirements, no QS, and no Val. We had also approached an Auckland focused non-bank lender for this transaction and were provided an offer at 65% LVR at similar pricing but with a QS and valuation requirement. After indicating the rough terms of the other offer, we got to a position where they dropped 0.50% of the rate and waived both the QS and Valuation conditions. This was a 10+ unit development in Christchurch which we would generally not see this Auckland lender fund without the oversight of a QS on the project. It goes to show they are willing to negotiate to win deals.

Case Study 2

Lateral Partners deal closely with a number of lenders and as such we often find ourselves in a position to secure strong pricing on transactions. Recently for an established client who has worked closely with Lateral Partners and a funder we were able to secure a discount to their traditional rates as a recognition of our and their relationship with that Lender.

As Lateral Partners has a core focus on the development lending market we have a much better grasp on market pricing and appetite as well as entrenched relationships with lenders that we can leverage to clients benefits.

We have largely seen the margins of development financiers be squeezed over the past 6 months. Rather than passing every OCR increase through to customers they have been forced to absorb some of the more recent hikes. We believe they realise that there is a point where projects will no longer make commercial sense if rates/fees creep into the high teens.

Case Study 3

We recently arranged a facility for a client in Wellington for a townhouse development that showed a profit margin of 9%. The project was underway through a reputable sponsor and supported by a strong level of pre-sales however this still shows a willingness to budge on one of the key metrics. Generally, we are seeing funders show an understanding that expecting a 20%+ margin on every project is wishful thinking.

Further, we were aware of a bank who was also keen to support this project, albeit at a lower gearing. This shows it isn’t just the non-bank lenders that are looking at higher risk projects.

Plain Sailing?

Despite this flexibility, it is certainly not easy to secure funding due to the exceptionally tough market to achieve sales, a decent margin and sufficient equity. In recent times a lot of our clients have chosen (or been forced) to proceed with funders that are willing to waive all pre-sale requirements. The compromise is either paying higher rates or tipping in more equity than they expected which in some cases has caused issues. Ultimately it is better than sitting on low yielding consented land with finance costs ticking up. We see plenty of these deals come across our desk too…

How can you go about navigating this market?

The simple answer is to engage with the right 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. Our internal list of 100+ commercial lenders is regularly being updated with notes of latest pricing, and preferences between locations, asset classes etc.

If you have a project in the pipeline, please don’t hesitate to reach out.

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