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Interest in alternative lenders rises

With banks rationalising their commercial real estate loan books, non-bank lenders are plugging a funding gap in the property development market.

Bayleys Real Estate director of corporate projects and development land sales Gerald Rundle says while banks haven’t completely backed out of development lending, they’re not necessarily pursuing that segment of the lending market.

“So we’re seeing non-bank lenders stepping up to the plate to get projects moving forward, as they’re less constrained by prescribed boundaries when putting bigger deals together.”

Banks are heavily regulated which restricts them going outside of policy to fund the majority of development projects, according to Nick Bullick who is chief investment officer for commercial real estate financier and investment manager, MaxCap New Zealand.

“Banks rely heavily on presales/off-plan sales to mitigate their market risk however, that’s very hard to achieve in the current environment and banks are not replacing development loans that are repaying, leaving a funding gap that the non-bank market is happy to fill.

“Non-banks offer bespoke, flexible lending structures and capital certainty for property investors and developers allowing them to start projects earlier and in most cases, with higher leverage than a bank can offer.”

At best estimate, Bullick says the non-banks have around seven-percent market share of New Zealand’s commercial/development lending, lagging well behind Australia at 20-percent market share and growing, and a global average of 50 percent.

“The niche non-bank market in New Zealand has typically comprised of lots of small operators or private families providing bridging-type loan facilities, but we’re starting to see some of the major institutional private credit investors set up offices in New Zealand.

“Once we see them demonstrably deploy debt capital into New Zealand, the non-bank market share will grow rapidly to become mainstream and in line with the rest of the world.”

Bullick says astute developers are recognising that similar to Australia, New Zealand could face an acute housing shortage in two to three years off the back of high immigration so are activating projects now with non-bank funding to deliver their product into a much more buoyant market once completed.

MaxCap specialises in construction loans but also provides funding for land banks, residual stock and value-add opportunities, drawing on capital from a broad base including some of the largest global pension funds, to high-net-worth individuals and family offices.

“We will fund any commercial property or development that makes sense and we are able to buy into the strategy of the investor or developer,” says Bullick.

Vega commercial finance specialist Kevin Miles says his firm specialises in non-bank loans for smaller to mid-sized projects, typically for deals up to $30 million, and is active in the market funding multi-unit residential developments, commercial projects and land subdivisions.

Miles says non-bank lenders have funds to place and are looking for development project deals to lend into, and unsurprisingly given that for the first time in 30-odd years, interest rates are above yields, there has been very little done on the investment debt side of the coin recently.

“The market was initially constrained by banks wanting two-times interest cover, which was logical when commercial rates fell to around three percent, but made no sense at an interest rate of eight percent.

“The killer has been the inversion of interest and yield – why borrow at eight to nine percent to buy an asset that yields six percent?”

Continued growth in appetite for exposure to the New Zealand market from overseas funders is being noted by Miles, with particular interest from Australian-managed funds.

At the commercial real estate coalface, Rundle coordinates a team of land sales and development-focused agents around the country. He says the Waikato and Bay of Plenty regions are proving to be active hunting grounds for proactive developers and there are good opportunities available.

“These regions are now far more connected with Auckland and can leverage the advantages that the economic golden triangle offers businesses.

“There’s the push factor as it’s quite difficult to do large-scale development in Auckland right now given the scarcity of favourably zoned land, and council policy barriers to development such as uncertainty about future urban-zoned land and infrastructure challenges.

“But equally, there are pull mechanisms such as cost advantages, population growth, locational benefits and lifestyle opportunities. Hamilton is currently outperforming other markets however, like Auckland, is also finding it increasingly challenging to fund infrastructure to service growth.”

While a little sluggish, Rundle says the Auckland development pipeline is still moving with the likes of Simplicity Living – owned by KiwiSaver provider, Simplicity – strategically acquiring pivotally located super sites to provide housing supply under a build-to-rent (BTR) model – a growing market segment.

“Realistically, offshore investment will likely be needed to optimally progress this long-term rental sector and the Government’s intentions to amend the Overseas Investment Act could speed things up and make it easier for new development to happen.

“There would seem to be demand for BTR development well beyond Auckland with other major centres crying out for innovative housing options that provide security and can leverage transport and amenities within established and well-located neighbourhoods.”

This article first appeared in Bayleys’ Total Property portfolio.

Read the full version here.

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