Home building still buoyant

Fears development funding has dried up and that new housing supply will be affected are growing, but experts don’t expect a repeat of past busts. Miriam Bell reports.

2022-05-15T07:00:00.0000000Z

2022-05-15T07:00:00.0000000Z

Stuff NZ Newspapers

https://fairfaxmedia.pressreader.com/article/282849374580817

Homed

The country’s longrunning shortage of housing is considered one of the drivers behind the huge price increases of recent years. While the shortfall has been eroded by high levels of home building and slower population growth over the pandemic, a shortage remains, and there is a concerted Government drive to boost supply further. But escalating construction costs, rising interest rates and supply chain-related delays are causing problems for developers. Some developments have fallen over, and last week Wellington construction company Armstrong Downes Commercial went into liquidation. Now, mortgage advisers are warning that funding for housing development has dried up. Mortgages Online director Hamish Patel says developers are facing a credit crunch and even non-bank lenders are holding back. He is struggling to find lenders willing to finance small developments, unless they are being built to rent, rather than sell. It is possible to get it for people with lots of equity and good cash flow, but strong presales are critical, he says. ‘‘Building costs are increasing at the same time sales are slowing down, and many developers’ cash flow is tied to sales, so the combination can lead to funding problems. If a developer then can’t generate more sales, or get more finance, liquidation may seem a better option.’’ There is a real risk of a downturn when more halffinished projects start to get dumped, Patel says. ‘‘It might only be a minor percentage that topples, but it can disrupt the whole market as people panic. In turn, that makes lenders reluctant to keep funding.’’ Mortgage Supply Company director David Windler says development funding has been tight for a while, but non-bank lenders have got fussier about where they are allocating resources. They are worried about increasing building costs and reports of developments not settling or running into problems, so their appetite has diminished, and they are cherrypicking deals, he says. ‘‘It needs to be a good deal to get approval, and lenders will protect themselves up front by making sure it is a strong proposal with good margins. ‘‘Initial approvals may also be more conservative because lenders don’t want to end up in a situation where they have given money to a development which runs into problems.’’ The tighter funding may mean fewer developments get off the ground and that could affect the supply pipeline, Windler says. But it is likely to be smaller, less experienced developers who are harder hit. ‘‘Bigger, more experienced developers will be making the most of wholesale investors to take care of their own funding requirements. They also tend to be safer for lenders because they have bigger contingency funds.’’ New Zealand Mortgages & Securities director James Kellow says a genuinely good project will get funded, but developers and brokers always claim finance is hard to get. ‘‘They believe their project should be funded, even if the development is under power lines in a bad area. But sometimes it is just not a good deal. ‘‘Less experienced developers don’t necessarily acknowledge problems or reassess the project, whereas an experienced developer knows what the public wants, and they know what is good or bad.’’ This matters in the current market where house prices are no longer going up faster than costs, and pre-sales have slowed considerably. It means lenders are wary and less likely to approve deals, he says. ‘‘But projects are still getting more than half pre-sold, which is enough to fund them if they are a good proposition. I’d say the money is tighter, but it has not dried up.’’ His company is flat out, doing five deals last week when it would usually do one a week, and people are negotiating on loan offers. ‘‘So we are not the only financier lending, others are too. As lenders, we want to finance developments, because if we don’t do deals we don’t make any money.’’ Auckland developer David Whitburn, who is a former president of the Auckland Property Investors Association, says more developments are likely to fail and that will make lenders even tighter with their funds. They are already factoring in higher interest rates, and they want more pre-sales to be satisfied in the viability of a development, he says. They are also not keen on new-to-bank lending, instead they want tried and tested customers. ‘‘It means a lot of demand can’t be satisfied, and we are seeing more projects which have consents not being built. But the danger is if pre-sales drop further and then interest rates come in at a higher point, that’s when developments fall over.’’ While the situation could affect the supply pipeline, the environment is not like it was in the global financial crisis (GFC), Whitburn says. ‘‘Back then, it was carnage, and you couldn’t get finance to do anything. Now there is more supply in the system, and not as much negativity around. There’s also likely to be investors looking to pick up new build bargains, and that’s a layer of protection for developers.’’ Economist Tony Alexander says another point of difference is that there is not a huge amount of non-bank lenders around, because after the GFC they did not return to the same degree. That means the number of developments financed beyond realistic viability is not as great, and lenders are less exposed to projects that could fall over, Alexander says. ‘‘So don’t expect to see a rerun of the sort of development collapses that occurred in the 1970s, or in 2008 to 2010. But we might see a correction from an unrealistic level of activity in the pipeline,’’ he says. Banks are familiar with the construction cycle, and know that every boom part of a cycle brings inexperienced, overoptimistic developers out of the woodwork, he says. ‘‘Their challenge is not to lend to newbie developers excessively, and to keep a close eye on them when things get tougher. They will now be pushing back against applications from them, and nonbanks will have tightened up, too.’’ Larger, established developers should fare OK, but lenders are likely to tighten their credit criteria further as the cycle winds down, Alexander says. ‘‘But we are miles away from it impacting on the supply pipeline. There is no shortage of projects in the works, even if finance has tightened up for others. So a large number of projects would have to be cancelled first.’’

en-nz