Tight credit market creates funding challenges for property developers and investors

30 June 2020
Tight credit market creates funding challenges for property developers and investors

With New Zealand property developers and investors struggling with a tight credit market and overly-cautious banks, non-bank lending institutions are being called upon more than ever before to get development projects off the ground post-lockdown.

Alpha First Mortgage Investments is one such non-bank lender experiencing high demand for funds.

While the lockdown affected non-bank lending during the first half of the year, Director of Alpha First Mortgage Investments Scott Massey says the company is receiving plenty of new loan applications, with property developers, in particular, looking to borrow for new projects and acquisitions as they are turned down by banks.

“Many developers are struggling with the current tight credit market, as banks are very hesitant to lend for construction or residential property development projects. Compounding the issue is the fact that there are not as many non-bank lending institutions with available funds now as there was pre-lockdown.

“The tight credit market also means that interest rates for commercial loans are unlikely to drop anytime soon. It is demand versus supply situation.”

While Alpha First has funds available through its exclusive funding facilities, Massey says the company is being cautious and conservative when assessing potential projects.

“We’re particularly focussed on lending to new residential developments, as I believe the residential market, particularly in the main centres, will continue to experience high demand for housing with investors and first home buyers very active in the market.

“We are considering all enquiries from potential borrowers to see if they fit our broad criteria, but we are looking for LVRs under 60%, a clear and achievable exit strategy and certainty around the servicing of interest payments.

“We are approving loans for no less than twelve months, which should ensure that the market is well into an upside phase when our borrowers’ loans mature.”

Massey is of the firm belief that there will be no ‘plunge’ in the housing market, but instead predicts some adjustment over the next six to nine months.

“It is our belief that the housing market will remain stable – this current situation is not an economic or banking crisis – it is a health crisis that will be resolved in time and normality will return.

“Even if the market slows, the fact remains that New Zealand is short around 25,000 homes and that number may grow. The balance between demand and available housing stock is about the same as it was pre-lockdown, and the reasons why people buy and sell houses are still there, such as marriage, retirement downsizing, and starting or expanding the family.

“A positive for the residential housing market is that interest rates have hit new all-time lows with banks already offering sub 3% loans. “These market conditions are good news for property developers and investors as residential housing demand drives the demand for new housing projects.”

Yet, on the other side of the equation, wholesale investors who are looking to put their cash into facilities that provide a good return are struggling to find options with good interest rates, says Massey, with bank rates getting ever closer to 0% for short-term term deposits.

“We know that bank interest rates are frustrating for wholesale investors, so Alpha First offers our clients the opportunity to invest in first mortgages secured over saleable land and buildings while generating around eight to nine per cent net per annum. Many are finding this an attractive option in the current market.”

Massey believes investment rates of interest in the trading banks will continue to fall, and around two per cent (2%) will be the norm for the next year or more. It is encouraging its wholesale investor clients to continue diversifying investment portfolios during this time.

Alpha First Investments assists borrowers with funds for projects ranging from $200,000 to $5 million. Clients seeking development funding can often secure loans even after their request has been declined by banks.