Recent months have brought welcome relief, with the RBNZ cutting the OCR. We've also seen long-term rates fall, although more recently the longer end of the curve has flattened — and in some cases edged slightly higher.
How many more OCR cuts are still to come, and where the bottom of the cycle lies, remains uncertain. At an OCR of 3.5%, there’s still some ground to cover to reach what the RBNZ considers a neutral OCR - between 2.5% and 3.5%.
While inflation trends will play a major role, economists generally agree that further rate cuts are expected in the coming months.
Investment in Industrial and Commercial Property
Interest rates change faster than yields, despite what some vendors might think.
Bank commercial property debt is more expensive than residential mortgages because of the way banks are required to allocate capital by the RBNZ. Whilst for those corporates with big balance sheets the difference may be less than 1%, for those at the smaller end of the market the premium remains around 2% - 2.5% above residential mortgage rates.
Importantly, we are rapidly approaching the point when the market will revert to yield exceeding interest rate. Those lucky enough to be able to access debt through equity release on residential property may find they are already in positive cash flow territory.
The banks so far have generally stuck to an interest cover ratio at 1.5 of the net rent being the constraining factor when looking at sizing investment debt. With a reduction of 1.25% on the interest rate that has seen a typical small commercial property with yield of 6% increase the debt it can carry from 47% LVR to 55% LVR. So, we are not quite back at the historic 65% LVR level just yet. However, for those needing higher leverage the non-banks remain willing to lend on an LVR basis up to 66.6%.
Banks vs Non-Banks in the Current Market
Whilst non-bank debt may start at around 1% higher than bank debt, many non-bank lenders will accept interest only debt service, whereas the bank’s standard position is often to require the amortisation of debt over 15 years. For a $800,000 commercial mortgage this could make a difference between the monthly cash out for debt service of $8,012 for a bank and $6,333 for a non-bank.
The banks seem more willing to lend but response times remain a major issue. If speed is of the essence the banks still lag well behind the fast turnaround times the non-bank sector offers. We have seen non-banks deliver funding from an initial approach to settlement as quick as 52 hours!
Another consideration when deciding bank or non-bank is the non-banks are not interested in transactional services. For the time being, the complexity of moving a business’s transactional banking from one bank to another just to secure debt remains a major disincentive for many owner-occupier borrowers.
Property Development Finance
The banks still require a significant number of pre-sales, although it now seems to sit at the 70-90% of debt level rather than the previous 110% of debt level. Tight constraints remain around what constitutes a “qualifying pre-sale”.
We have seen some interest in the Government’s recently announced underwrite scheme and are working with several clients who have suitable experience and projects.
The non-bank market continues to expand with more players entering the market. For smaller infill developments typical terms are either:
- Fee of 1.5-2% and an interest rate of 11-12% on drawn funds only, or
- Fee of 2-3%, an interest rate of 7-8% on drawn funds and a line fee of 2-3% pa on the facility limit drawn or not
Whilst experience remains an important consideration, in major centres for many smaller developments pre-sales are not a requirement, and many funders do not require a valuation or a QS either.
The Vega commercial team encourage and welcome early discussion on potential funding options for investment and development deals.
Wwe also support clients with a wide range of funding solutions, including Lease Bonds, Business Finance, Asset Finance, Cash Flow Funding, and Personal Vehicle Loans. Our team is here to help you find the right option to suit your needs.
