26 January 2017

There's no shortage of cranes on Auckland's skyline. What is in short supply is enough new homes for the growing city.

Latest statistics show that more than 10,000 dwellings were consented in Auckland last year - but that's still some way from the 13,000 a year believed to be required to keep up with the city's demand.

A revamp of the unitary plan may stimulate building activity, by allowing more properties to be intensively developed, but at the same time, some property developers are struggling to break ground, blaming tightening lending conditions by the banks.

Two multi-unit property developments fell over at the end of last year because of funding problems.

Jon Sandler, the developer behind a 91-unit development in Avondale called the Flo Apartments, wrote to buyers saying the project would not proceed.

He blamed rising construction costs - up 20 per cent in only a year - and problems securing bank finance.

And the developer of the St James Suites told prospective buyers the central city development was not currently viable because of funding issues and was on hold until further notice.

"Financial institutions have tightened their lending activity to apartment developers in recent months, affecting a number of Auckland apartment projects," it said in statement to media.

Colliers, which was in charge of marketing the Flo Apartments, noted it was not alone as 35 Auckland apartment projects had been cancelled in the past year.

By deadline time, Sandler had not responded to questions about the financing of the project.

Despite the cancellations and the claims by some developers that the banks have stopped lending, the banks themselves say they continue to fund property developments.

But those outside the banks have noticed an increased caution about lending.

"They definitely are tightening up," says Greig Allison, a director of the Capital Group - a company which lends money alongside the banks to fund property developments.

"Banks have got limited capital. Their balance sheets are full. I think these deals are not happening because they haven't got the funding."

He says that is making banks picky and means they aren't about to lend on projects that don't stack up.

Allison says the hot property market has encouraged a lot of fringe operators to try their hands at development.

Many of those who are being turned down lack experience in apartment developments, he says.

"For the guys that know what they are doing, there is capital."

James Kellow, director at NZ Mortgages and Securities - one of the biggest development funders in Auckland outside of the banks - believes some of the complaints about funding issues have been overblown.

"Banks have tightened credit criteria but to prudent standards," he argues.

"This commentary about bank finance for residential and commercial developments either being pulled or drying up is completely overblown."

He says some of the projects that have supposedly been pulled were only at the conceptual stage, and simply had no commercial basis to make a start.

"When an experienced, well capitalised developer approaches for bank finance, particularly when supported by a credible mezzanine finance company, the banks are happy to assist."

He points to the success of the Conrad Group, which has just started its seventh apartment development in this property cycle at Union St.

"There is light years between an experienced developer and a 'first timer' when it comes to a bank approval."

It's a view that is backed up by Connal Townsend, chief executive of the New Zealand Property Council.

"Our research indicates that banks are still keen to lend to existing clients with a good track record," he says.

"But a new developer entering the market might find the going tough."

John Kensington, head of financial services at KPMG, believes the banks are quite rightly looking more closely at all their lending, but good developments are still going ahead.

"These are ones where developers are producing a quality product, they have a track record, they have enough cash of their own in the game to get it under way, they are substantial enough to weather delays, they have the builder signed up and pre-sales are proper pre-sales, not just $5k down as a deposit, and there is funding in place."

Kensington says the projects that are struggling are using the old model of $5000 down, don't have all the consents in place and have not raised finance before the start.

"The ones not going ahead are falling over for a number of reasons and many of them have similar characteristics: delays in getting consents, not all the funding in place, not fully/properly costed, not a real commitment that the bank or other funder can see from the purchasers, developer."

Kensington says in some cases, the developers were the ones who said no.

"To be fair, this isn't just the banks saying we can't do this. In some cases the developers are realising their project wasn't a go, and it's easy to say it's because of finance."

But Kensington also points to the fact that there are fewer funders than in the past.

"There aren't the companies that will just fund these developments now and those that do are privately owned and very astute and want to partner similar people."

NZ Mortgages & Securities is backed by the Manson family - estimated to be worth $550 million on last year's NBR Rich List.

Other financiers are sourcing their money from private, wealthy business owners who are comfortable putting up $1 million-plus, or overseas investors from Japan, Australia and China.

That's a big contrast to the property boom, which saw professional directors borrow money from the public to lend on to property developments.

Many of those finance companies collapsed in 2007 and 2008, leaving small investors massively out of pocket.

Of the 63 companies which fell over, only $4.5 billion of the $8.5 billion owed to investors was paid back.

William Cairns, a director at mortgage financier Cairns Lockie, says there are far fewer lenders than in the past across the industry.

"If you go back 30 years ago, we had a plethora of solicitors, credit unions, building societies and finance companies that were New Zealand owned and operated.

"A lot of them were not particularly well managed. That was a regulatory issue. They haven't been replaced by New Zealand owned competitors to the banks."

He says the New Zealand-owned banks such as Heartland Bank, SBS and TSB are only a small slice of the market and there isn't a group of second tier players which have picked up the slack.

So when the banks say no to development finance, there aren't a lot of other choices.

"There is just not those large second tier players."

Cairns has heard of at least 12 projects falling over, and says the problem with development projects is that it's not just one home, but 50 or 60 units that aren't going ahead.

One solution he sees on the funding issue would be to allow overseas buyers to buy only new dwellings.

"That would be a solution."

But he says a longer term answer has got to be the development of a group of indigenous players in the market.

He points to UDC - a large finance company recently sold by the ANZ to a Chinese conglomerate - as a missed opportunity.

But he admits the other part of the problem is funding local finance companies.

After the collapse of so many in 2007 and 2008, few mum and dad investors will be keen to put their savings on the line again.

"There doesn't appear to be a group of New Zealanders wanting to get into the industry."

Cairns says if developments don't tick all the boxes for the banks, they should be charged higher interest by another lender.

But Allison says it's not that simple.

"You can price the risk in but if the deal goes bad you lose all the capital."

He believes it is simply better not to do the higher risk developments, and that is what the banks and other funders have learnt from past boom-and-bust cycles.

"What they don't want is projects falling over half way through which is what happened in 2009-10 with the finance company collapses.

"That really destroys the market."

So far this boom there haven't been any major projects failing part-way through, which Allison says is a good thing because if the banks lose money they will get much more cautious.

Townsend says a lack of funding for inexperienced developers is not a bad thing.

"Is it a problem? Like all things, there are two ways of viewing this.

"The unitary plan gives us a green light to develop and we have a huge task ahead of us. But we also don't want a 'feeding frenzy' of imprudent lending."

Townsend says that was exactly why much of the finance company industry collapsed 10 years ago.

"Hence a more prudent approach to lending."

But it still doesn't solve the problem of not enough homes being built to meet the demand.

Townsend says it is hard to know what should be done but "there are obviously opportunities for new mezzanine funders to enter the market."

One possible option is crowd-funding - new digital platforms which connect investors with potential development opportunities.

The Herald understands there is a company working on a proposal to crowd-fund property developments. However, it has yet to gain a licence from the Financial Markets Authority.

Allison says the supply issue is not a problem that the commercial industry should have to solve.

"That is a political issue rather than commercial. We wouldn't back a marginal project because there has got to be a profit in it for everyone."

He says it is not up to the lenders, nor the developers, to tackle social issues such as providing affordable housing.

And he points to all those cranes in Auckland, saying there is still plenty of building happening.

"There is a lot of houses coming into the market - just look at all the cranes."

So supply is hitting the market. But is it enough?

"That is a really complicated question. We don't want to oversupply it as well."

Buyer beware

One development funder says knowing more about who is funding a project is becoming increasingly important, as more people buy apartments off the plan.

James Kellow, director of NZ Mortgages & Securities, says people are very focused on their own borrowing when it comes to buying property.

"People are naturally more worried about securing their own mortgage and often overlook how the development itself is being funded and what risks are associated.

"My advice is get hold of all the information you can, and get it professionally reviewed."

Banks typically lend up to 70 per cent of the costs of a development, with the remaining amount funded through either non-bank lenders, equity or money put up by the developer itself.

Because of that, Kellow says it also pays to do your research on any non-bank funders involved.

"There's basically the four leading retail banks and probably four or five property finance companies in New Zealand that are well capitalised and aren't going anywhere (NZMS, Capital Group, Spinnaker Capital, Newgate Finance and ASAP Finance).

"Anyone else needs some real due diligence."

Kellow says there is no such thing as a standard contract for buying an apartment off the plan, and people also need to check out what previous experience the developer has had.

"Ask if they have done a development before. Can you get a letter from their financier saying if it is likely to proceed. Can you get a letter from a bank saying how many pre-sales are required before the bank will lend on the project?"

He says most developers can't go unconditional on unit 1 until they have sold unit 100, so it makes sense to build a clause into any contract which allows you to get your money back if construction hasn't started within a certain time.

Many developers also have this out-clause, which means they can back out if they don't get the pre-sales or funding required to go ahead, leaving buyers back at square one.

Lining up all of the ducks before signing on the dotted line could be the key to preventing future heartbreak.