The most common topic of discussion in relation to commercial and industrial real estate over the last month or so, has been around finance and borrowing – or increasing difficulty with this. To be clear, what follows might seem an unfair assessment of the banking industry, that is full of good people, but seemly constrained by the banks increasingly restrictive internal credit policies.
We are having discussions every day, so it’s fair to say that where there is smoke, there is likely to be fire. Consistently we are being told by the banks that they have the ability to lend money, but what is the saying ? – actions always speak louder than words. Their appetite certainly seems to have diminished over the last nine months or so.
Finance and the ability to borrow is a critical element for development, whether it be residential, commercial, industrial or infrastructure, to enable us to develop and continue to grow as a city, and also as a country. Without capital it’s also incredibly difficult to invest in, upgrade and modernise assets.
Invariably banks are now requiring much greater security and assessment of cashflow serviceability in order to lend. Tightening lending restrictions, along with rising interest rates is already causing some pain, which appears only likely to increase in the short term.
Even as land and construction costs have increased through 2020 and 2021, the ability to borrow at viable interest rates, still paved the way for development continue. Second mortgages are now being put under the spotlight, along with second tier non-bank lenders either charging near uneconomic interest rates, wanting repayment or charging penalties.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning” – Henry Ford
While it seems highly unlikely that we are going to see an avalanche of mortgagee sales, we are already seeing signs of vendors being “instructed” that they need to get their house in order. Put simply, they will need to sell assets, often their best assets, as these are likely to realise the best prices.
The Reserve Bank’s CFR (Core Funding Ratio) was cut in April 2020 from 75% to 50% in order to support banks lending during the economic uncertainty caused by Covid. On 1 January 2022 this limit was returned to 75% – the issue is that the tap, often due to Reserve Banks decisions, seems to either be turned on fully or turned off completely, rarely having times where there is a nice steady flow of finance causing neither a flood nor a drought.
Talking to a particular developer last week, banks are not looking to lend on many development projects and second tier lending at 12% plus, make many projects unviable. They have resorted to sourcing private funders at around 8% – not ideal, but they can make projects work at this level. Once a project is completed, first tier bank lenders come back into play.
To be clear, many of the parties with these issues are not new to the market or fly by nighters. Hamilton remains extremely fortunate to have an extensive pipeline of development at various stages of actual construction and well underway, as often its ‘proposed’ developments that are delayed or put on hold.
They may say they are lending, but to many it obviously doesn’t feel like it – for our financial institutions to consistently back their development horses for the entire race – particularly the stayers with proven or reliable track records. Different if it’s a horse on its first outing, with no pedigree or previous race experience. Every horse will have a bad outing or two, but the most successful trainers and owners know a good thing when they see it.
The challenges we have are unlikely to be long lasting and financial institutions will want to retain these clients as the market returns – Hamilton and the Waikato have strong fundamentals for the future, so the risk seems minimal. We are increasingly a desirable place to live and to conduct business, we have strong geographic benefits within the golden triangle and the likelihood of a major disaster is
negligible.
