Non-bank lenders fill credit gap for housing developments
New Zealand’s current credit environment among retail banks is driving property developers to non-bank lenders to fund desperately needed housing developments.
Omega Capital Director Scott Massey said as the Government continues to implement controls to cool the overheated housing market, where median house prices have risen more than 25 percent over the past 12 months, it was also impacting developers wanting to borrow to build new houses.
“There is continuing reluctance by New Zealand’s main trading banks to lend to speculative builds and for the development of land for residential houses,” said Scott.
“They are simply not taking as much construction risk and as non-bank lenders that is fortuitous for us because we can step in to fund these projects,” said Scott.
As retail banks focused more heavily on capital preservation, it also lowered their appetite for risk, meaning constrained access to funding or limited access for developers, said Scott.
“The Government can’t direct banks to who they should lend to. All they can do is put in place directives which impact the controls on lending. But these controls also have some impact on property developers, which just exacerbates New Zealand’s massive housing shortage that isn’t going away,” said Scott.
This current market situation means non-bank lenders like Omega are increasingly filling the gap left behind by retail banks.
A recent Property Council report claimed property was now the country’s largest industry, contributing $41.2 billion a year to gross domestic product (GDP), or 15 per cent.
“As lending businesses, we are certainly benefiting from it but the housing market which is facing massive shortages in supply is also benefiting from the fact non-bank lenders are willing to step up and provide the funding to get houses built,” said Scott.
He said non-bank lenders were cognizant of trends in the market and they were looking carefully at loan to valuation ratios, but because the New Zealand market still faced a huge gap between demand and supply, not much was going to change until more houses were built.
He believed the current lending environment was likely to remain for many years because banks wouldn’t suddenly change their lending criteria around speculative land development.
“We don’t see any immediate change in sight. There may be a softening in the residential market, but the main thing is we have a housing shortage, and we need developers to build more houses. There is still a huge gap between supply and demand,” Scott said.
“It means there will be more developers and new home builders coming to non-bank lenders like Omega Capital to fill the gap,” said Scott.