Leading non-bank lender urges Government to address housing developer funding squeeze

29 March 2021
Leading non-bank lender urges Government to address housing developer funding squeeze

Scott Massey, Director of non-bank lender Omega Capital, says the Government’s new housing package announced last week does not address one of the biggest barriers to housing supply: developers’ access to finance.

“Omega Capital is talking to developers around the country every day who can not gain access to bank funding for their housing projects.

“When developers are forced to alternative finance sources, they add 8-10% to their funding costs. This dramatically affects housing affordability because that 8-10% is passed directly through to home buyers.

“Inability to access funds also affects the speed of delivery because developers become more cautious when margins are eroded. If a developer plans a housing project where they expect to make a 20% margin, but due to higher finance costs margins drop to 12%, they may not proceed.

“There are many shovel-ready projects in the pipeline across New Zealand where access to low-cost finance would play a significant role in bringing shovel-ready projects to market. The Government could get these projects started quickly by stepping up and underwriting prime funders’ loans to developers,” says Massey.

Noni Martin, Property Finance Consultant at Omega Capital, says while the Government tried to address the developer funding issue with Kiwi Build, it is a flawed initiative.

“When I worked in banking before joining Omega, I was involved with a developer looking at a 230-lot housing project worth around $30 million. He applied for Kiwi Build support and it took nearly nine months and a $180,000 legal bill to get from negotiation to closure. From my experience, Kiwi Build is not practical, particularly for smaller developers, and is not doing anything material to increase housing supply.”

Omega Capital was established in 2011 by Scott Massey who has over 30 years of experience in property and property development. The company increased its developer lending portfolio by 30% over the past two years to over $100 million. He puts the company’s growth down to prime lenders’ decreased risk appetite.

Martin says building and land developers in the regions are particularly disadvantaged when it comes to accessing finance.

“Developers in the regions are finding it extra tough to access funding, so we have a strategy to do what we can to help building and land developers right across the country. Around 60% of the developments we fund are in Auckland while around 40% are in the regions.”

Massey is quick to congratulate the Government on the announcements last week related to increasing income caps and house price caps for First Home Grants and Loans. He also believes the $3.8B fund being set up to enable build-ready land for new housing projects is significant.

“However, affordability and supply are the two key issues here. And the Government’s announcements last week do not address the affordability side of the equation.

“For instance, the cost to build an entry level house in New Zealand is around $2200 per square metre, double the cost of the same spec home in Australia. That’s because our exported, dressed timber costs Australian builders around 40% less than local builders can purchase it here. New Zealand’s builders are basically subsidising the export of timber to Australia. This comes down to monopolistic behaviour, which the Government needs to urgently address,” says Massey.

Massey believes that although New Zealand is officially in a recession, the property market boom will continue. “There’s a lot of positivity in the property industry and we expect it to remain buoyant for the foreseeable future, with the exception of tourist centres like Rotorua and Queenstown.

“Last week’s Government announcements will impact how our team analyses potential finance for development projects. We will look more closely at how our clients can service debt, particularly without the inability to write off loan interest if they have a significant residential housing portfolio they rely on for collateral.

“We also expect to see some residential housing investors switch to commercial investments since interest on commercial property loans is deductible.