Developers face significant pain points with access to finance just the latest hurdle

16 December 2022
Omega Capital news

Developers face significant pain points with access to finance just the latest hurdle

Commerce Commission recommendations to boost competition in the building materials industry is not enough to address the current pain facing developers, say nonbank lenders.

Omega Capital General Manager Noni Martin, says New Zealand’s developers have battled the building supplies shortage and increasing costs, navigated one of the worst labour shortages in history and now many are against the wall, struggling to get finance to complete developments.

“For a mix of reasons, including regulatory pressures, return, and the currently declining market, main banks have all but stopped lending to developers. Nonbank lenders like Omega Capital have stepped in to fill the gap but in the current market, developers are finding it very difficult to get funding,” says Martin.

The Reserve Bank’s Financial Stability Report shows lending by nonbank institutions has grown rapidly from $1.9 billion in 2019, rising to $4.82 billion at August 2022.

“Even with nonbank lenders plugging the gap, developers are still struggling to get finance. Many developers who traditionally qualified for affordable bank finance have been faced with higher nonbank finance costs for some time now, which also affects price and ultimately affordability,” says Martin.

As the market has shifted nearly all nonbank lenders are now also requiring presales on developments and in the current market developers are struggling to get buyers in the door, says Martin.

She says there are five pain points, unrelated to market prices falling. The cost of finance, the cost of materials, the cost of labour, development contributions and consultant fees.

“Every single one of those costs have gone up significantly in the last 24 months and many of those cost increases have nothing to do with the market correction currently playing out,” says Martin.

There are increasing reports of developers shelving projects and it has serious implications for addressing New Zealand’s housing shortage in the medium term and for the economy, says Martin.

“The Government really needs to sit up and take notice of developers’ struggle. It’s been suggested with net migration down and building consents up that our housing shortage is no longer a concern, but Kiwibank economists have just forecast significant migration in 2023,” says Martin.

In a 5 December 2022 report, Kiwibank economists upgraded net migration forecasts and now expect an annual peak of around +36,000 in a year’s time.

“That figure has potential to increase in coming months. The Government is already trying to address the dire labour shortage with new policies so there’s only one way it can go, and that’s up,” says Martin.

“That will put increased pressure back on our housing market but even then, houses will still be unaffordable because the forecast declines will only remove around one year’s worth of value growth, after a sustained period of double-digit value increases,” says Martin.

Alongside addressing issues like competition in the building materials market, the Government should also be looking at how to incentivise developers to build in areas where supply and affordability are the worst, and making affordable finance available to developers, says Martin.

“The Government created the “Funding for Lending Programme” which allowed financiers to pass on the benefits of low-cost funding to incentivise new builds in the residential market. It could do something similar for developers in areas where housing availability and affordability is an issue,” says Martin.

“There are a significant number of pain points for developers in the current market and while nonbank lenders like Omega are doing what we can, developers are hamstrung and it will have significant effects for ongoing housing affordability and our economy,” says Martin.