Covid-19: The impacts of the latest lockdowns on development finance

Commercial Lending 2021

 

We’re now in our fifth lockdown, the third for 2021 and while the rest of New Zealand is at Delta 2.0, Auckland still awaits a lifting of restrictions. Thankfully how the financial industry is responding to lockdowns has changed dramatically since last year’s approach. Unlike in 2020, the non-bank financiers are not shutting their doors. In fact, everyone we have spoken to is ‘open for business’. This is a different mindset from last year where funding lines were being pulled, investors were withdrawing funds and funders were reluctant to extend any further financing.

What we are seeing though is that some non-bank funders are being more selective in their asset types – i.e. a shift in wanting to balance their books away from bareland and development, which has become top-heavy in the past nine months, and gravitating more towards standard residential and commercial asset types.

Some funders have changed their pricing regime in the past 10 days due to Covid and while this is not the standard practice within the industry, we believe that it may become more prevalent as the lockdown period is extended out and the market perception that finance will be harder to achieve.

Banks are prepared and systems are in place to continue providing services to brokers and their clients. We are continuing to liaise with bankers and they are accepting our submissions for new transactions. Wait times for an answer are understandably longer than usual and resources are stretched, but we are feeling more confident than in 2020 with obtaining finance for clients.

We are however seeing that banks remain difficult to deal with in relation to commercial transactions, i.e. development, bareland and commercial property – these asset classes continue to be outside of their appetite, which has actually been the case for some time now. They tend to cherry-pick the best ‘new to bank’ deals and only look to assist existing clientele that have a proven track record of delivery. 

As a commercial unit at Vega, we have continued to see a huge amount of development and pre-development (bareland) transactions come across our desk which typically range from $2-15 million. This debt range is ideal, as it comes with a wider range of financiers willing to facilitate.

The cost of materials and supply chain issues are here to stay and Covid adds an additional element of concern for developers being time wasted and running over expected completion timeframes which equates to a reduction in ROI due to additional interest costs and rollover fees. The use of a QS and robust costing schedules are becoming paramount to funders that are wanting additional comfort that a developer is not going to come up against cost overruns which will subsequently erode their equity position and LVR within the transaction.

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