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Roger J Kerr says residential property developers with land and consents in hand are now turning to the non-bank lending providers to source the finance they need to make the projects happen

Bonds
Roger J Kerr says residential property developers with land and consents in hand are now turning to the non-bank lending providers to source the finance they need to make the projects happen

By Roger J Kerr

The corporate bank lending market landscape is changing, with the dominant Aussie banks not growing their balance sheets due to their own funding and capital allocation constraints.

Competition for retail bank deposits continues to exert upward pressure on the banks’ cost of funds, as does increased wholesale debt market funding as some of the banks need to repay Australian parent bank inter-company loans.

Bank borrowing costs therefore continue to increase, meaning that they will seek to recoup the increased funding costs through increasing lending margins to borrowers where they can.

New entrant Chinese banks in the NZ bank market are picking up some of the corporate lending opportunities with competitive pricing.

However, this is more in a participation role alongside the Aussie banks, not generally in a lead bank position.

Corporate borrowers need to be anticipating continued upward pressure on lending margins from the Aussie-owned banks.

Borrowers in the equivalent BBB credit rating space should be seriously looking at the corporate bond market as a viable alternative non-bank funding source.

The ability to issue debt for five and seven year tenors at all-up margins over BKBM not much higher than bank facilities should be attractive for them.

A formal credit rating is not really necessary for a corporate bond sold to retail investors if the issuer has a recognisable household name.

The seven-year wholesale swap rates are currently 3.20%, therefore a margin of 1.80% at least is needed to achieve a 5% coupon return to attract the attention of Mum and Dad retail investors.

A credit rating is required to issue volume on a private placement basis into institutional investors.

The mainstream banks have pulled out of the residential property development lending market almost entirely as their Aussie parents limit capital allocated to this loan asset class.

One hopes that the Government’s desire to up the ante on residential housing supply to meet the growing demand is not stymied by these bank lending policies.

Residential property developers with land and consents in hand are now turning to the non-bank lending providers to source the finance they need to make the projects happen.

Expect to see an increase in property related finance companies taking advantage of the opportunity.

The Reserve Bank, the Government and FMA should be watching these developments closely as the last thing the NZ economy needs is a repeat of 2009 with finance companies failing and retail investors losing their money.

The historical finance company failures were due to poor funding and liquidity policies/practice, over-reliance on one funding source, under-capitalised balance sheets and falling property values.

If residential property developers cannot get financing the associated land values will reduced until a well-capitalised developer picks the asset up for a song.

Retail investors should be wary of new finance companies offering 7% and 8% returns as the assets the money is being lent out on might be at the riskier end of the scale. However, in a world of still very low fixed interest returns of 7% and 8% on NZ property loans may well be attractive to offshore wholesale investors seeking diversification and return.

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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5 Comments

Plain english translation: the banks know what is about to happen in the residential property market and are getting out, with haste.

Anyone who falls for the finance company line can be assured of a white knuckle ride at best. As for property values, now we find out the the true worth of property when you must use your own money to buy or develop it. Now all we need is some tax or levy which turns landbanks and unoccupied homes into loss making millstones and all those foreign ghosts will flee from the closet, priceless..........

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Those finance companies are great, no one has lost money via them recently have they?

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We worry about the big banks and stability. Then we look at 'finance companies' associated with property development and then the banks look so much better.

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Where are all these finance companies Roger?

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Property development is going to start going down quite badly, before moderately picking up as there is a bounce from more competitive pricing falling out of the downturn.
HNZ will still keep things going

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