Housing Up, Lenders Flush, Time to Borrow
Residential interest rates continue to remain low, borrowing restrictions on residential property are easing, and house and apartment prices continue to rise. What a change from a year or so ago.
I've had enough, I'm getting out
to the city, the big big city
I'll be a big noise with all the big boys
there's so much stuff I will own
Peter Gabriel Big Time see the video here
Residential interest rates continue to remain low, borrowing restrictions on residential property are easing, and house and apartment prices continue to rise. What a change from a year or so ago.
Housing Up
Long time readers of my newsletters will know I believe the housing market leads the economy so this latest news is a good sign for the future. (For some historical articles on this idea from an economist’s point of view read the Real Housing Market Story written by Rodney Dickens in 2010.)
In his latest Weekly Overview, BNZ economist Tony Alexander reckons the Housing Affordability Report is boring, tells us why he thinks Auckland house prices will keep rising, and why a Capital Gains tax wouldn’t change much. All of which I agree with. Go to page 5, it’s well worth reading.
The latest statistics about building consents are interesting. These rose 7.8% in September, the fourth straight gain and biggest growth since March, as intentions to build in Auckland and Christchurch gather pace. New dwelling consents were up 22% from the same month a year earlier, with Canterbury up 80% and Auckland permits up 50%.
The figures also show the value of non-residential building consents slipped 1.8% to $314 million from a year earlier, led by declines in offices and administration buildings and storage buildings. Overall annual commercial building consents rose 2.2% to $3.78 billion, while residential issuance advanced 22% to $5.87 billion. Read the TVNZ article here.
This is not surprising as parts of the commercial property sector still remains subdued where there is a general downturn in businesses - like retail and office - resulting in a shortage of tenants. In some areas you drive around new ‘for rent’ signs are prominent.
Lenders Flush
Well one reason for the change in the housing market is lenders are flush with money. They are looking for borrowers - and residential lending remains the favourite for most of them. But it’s not just for housing.
We’ve been getting lots of phone calls and visits from financiers looking to lend in the commercial property and business sectors.
So I thought it’s an appropriate time to re-visit some of the debt funding options available and comment on their usefulness. (As a commercial plug, at TBK Capital we are able to arrange all of these forms of finance for you).
Let’s start with businesses. Market feedback tells us some SMEs find it a stretch to pay the bills at the end of each month, and are seeking additional funds for working capital. In recent newsletters I have shown how equity – usually by way of “active participation” – can provide the working capital required to meet growth. Let’s now look at the debt options.
Traditional Bank Funding
Banks are eager to lend. For non-residential lending their criteria is much the same. They like bigger deals with established businesses or well tenanted commercial and industrial property. Good presentation of the request for funding is essential. But having a good personal relationship with the right people to present it to does make a difference and saves a lot of time and money.
Banks remain the cheapest form of finance with low interest rates unheard of a few years ago.
Most small businesses have their bank facilities secured against property – often the owner’s house or the property from which they operate their business. Other hard security can include other property, plant and equipment and stock. The banks (and competitive non-bank business lenders) love larger long established profitable businesses with good cash flows and hard security is less of an issue.
In times of need the SMEs traditionally borrow more by increasing their loan against the house, property, or plant. However there is a limit to this as the security has (an often decreasing) set value. Finance company lending of the type made before the Global Financial Crisis has almost disappeared.
Debtor and Invoice Financing
This has become a far more sophisticated method of financing businesses and there are more players in the market now. It is ideal for expanding businesses that qualify and would be one of the most flexible cash flow funding arrangements available.
- No real estate, plant, vehicle or other hard security is required.
- As the business grows so does the size of the facility.
- The debtors book is often the largest asset in the balance sheet and larger limits may be accessible than the existing security offered.
- It allows the business to access bulk and early settlement discounts from suppliers.
Advantages over other forms of secured loans include:
- Property security is not locked up, is safe from any downturn in the business, and could be used for other purposes.
- With hard security it’s the set value of the security that determines the amount of a loan - not the performance of the business.
- Current business performance determines the level of the facility rather that outdated trading history.
Commercial Property
Loans outside the lending criteria of the banks still aren’t that easy to obtain. However often banks will not lend for technical reasons. These include:
- Current overall exposure to the client exceeds credit guidelines.
- Inability to meet P&I servicing requirements.
- Too many vacant tenancies.
- Loan amount too high to reach loan reduction requirements.
- Loan to valuation ratio too high.
- Term of loan too long.
- Earthquake requirements.
This is where non-bank lenders become a viable option. They have a more liberal - or should I say a more flexible - lending criteria. And their interest rates have become more competitive.
By the way, we have access to private finance for commercial property on good terms in the $2 million to $5 million bracket - an amount that is quite difficult to get from non-bank lenders.
Developments and Subdivisions
It’s no secret there’s a severe housing shortage coming up in Auckland (and for obvious reasons in Christchurch). Finance is easing up for developments and subdivisions in the appropriate areas in and out of Auckland. Finance is available for smaller projects like subdividing off a section or sections and building houses in a planned manner.
Isolation of Security
It is sometimes beneficial to look at moving loans on some assets to another lender, usually from a bank to a non-bank lender with slightly different criteria. An example would be where the isolation of the security means performing assets cannot be called upon in the event a non-performing one comes under pressure. Another advantage could be less cash flow servicing requirements as interest only lending replaces P&I.
Refinancing works well for business too. Especially in the case where the original borrowing (usually from a bank) required residential collateral security to get it. As the business has grown that requirement might well have passed – but nobody told you – and it could be replaced by the other forms of security mentioned in this newsletter.
Finance or Re-finance for Bank Takeout later
This works for both property and business loans. Examples include:
- Commercial property being refurbished or re-tenanted.
- Residential and commercial real estate with short term debt servicing issues.
- Almost finished developments requiring short term funding to complete.
- Growing businesses strapped for working capital to fulfil orders.
- Plant and equipment finance for expanding business.
- Debtor finance. See above.
- Cash flow lending for businesses not quite ready for bank finance.
Olly Newland’s view
Well I started this newsletter remarking on how the residential property market has changed in the last year or so. So I can’t think of a better way to finish it as Christmas approaches than to quote from Olly Newland’s recent article entitled “The Year in retrospect ... and What is to come”.
Olly’s been around for a long time and together with people like Bob Jones - whose books, columns and general stirring I love - is one of the gurus of property in New Zealand. In a recent article he looks at “a number of influences and influencers on the property market in general”.
I’ve condensed/paraphrased his view on a number of matters relating to the property market that I can relate to - if not fully agree with them all.
- The effect of the Government’s ‘new initiatives’ to help the housing market will be minimal even if the intentions are well meant. Making more land available is only one part of the problem, the cost of housing construction materials is a greater problem - which seems odd in a country where timber aluminium and steel are produced in massive quantities.
- Interest rates will remain low and unless we see massive inflation will continue to do so while they are in line with the rest of the world. The side effect is savers will be tempted to put their money into other avenues of investment including investment property. House prices are likely going to double again over the next few years. As the value of a house goes up the owner feels richer and buys a more expensive house using the extra wealth. The only people affected are those NOT already in the property ladder - and they make up a small minority. Don’t forget the struggle to get into one’s first house has always been so.
- Commercial property does not make headlines but it too is undergoing a revolution. Low interest rates have meant where once upon a time a 10% return was commonplace, this has slipped to 6% or less depending on the quality of location and tenant.
- We now have a plethora of commercial syndicates offering all types of commercial investment for the smaller investor seeking higher returns. Some syndicates are absolute dogs enriching the managers rather than the investors. Buying a big dinosaur with a specialised single tenant in the back of some provincial town is not the best investment to get into, in my opinion.
- The cost of strengthening a building to meet new insurance requirements can be prohibitively expensive and there is no guarantee that having done it the building will be of any use.
- The improving market has brought out the usual bunch of spruikers offering “instant wealth” through property. All of them offer a quick path to riches, initially at little or no cost to you – or so they say. My friends, do not be fooled. There is no such thing as a “free lunch”. These spruikers are either going to sell you a property from which they will collect a hefty fee through an option or some kind of side deal arrangement. Or they will charge you after you have been convinced that it was all free.
He finishes off giving his opinion on where is the best to invest in property. He says, “The market consists of many parts all moving at different speeds. The trick is to pick the slice of the market that is about to move rather than climbing into one or another market at the last minute. Even more important is not to be talked into buying cheap rubbish in depressed suburbs. There lies losses and heartache trying to deal with third-rate tenants in fourth-rate houses.”
You can see the full article on interest.co.nz here. It’s also got some very interesting comments from readers which are well worth looking at.
Always happy to hear back from subscribers so if there's anything you'd like to discuss email or give me a call.
Cheers
JP
John Paine
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
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Email john.paine@tbkcapital.co.nz