By Gareth Vaughan
The chief executive of property financier Equitable Mortgages, which called in receivers late on Friday, says the group believes the property market could remain in the doldrums for up to another five years.
Equitable CEO Peter Thomas told interest.co.nz that it was a “$64,000 question” as to how the property sector sources a significant chunk of its funding in the future given Equitable is the last of the major debenture funded property finance companies to bite the dust.
He also said the taxpayer shouldn’t be left facing a shortfall from the receivership of Equitable, which has about NZ$178 million held by 6,000 depositors covered by the extended Crown retail deposit guarantee scheme.
Deloitte’s Rod Pardington was appointed receiver late on Friday, just two days before the introduction of new Reserve Bank non-bank deposit taker regulations covering capital adequacy, related party transactions and liquidity.
Thomas said with the plug being pulled now, if the receivership was managed correctly, the taxpayer shouldn’t be left short changed.
“To give you two extremes the receiver could decide to sell all the assets tomorrow and if that was the case there would be a significant shortfall,” said Thomas.
“However, if he took five years, then there wouldn’t be a shortfall and there would be an opportunity for some equity to be retained.”
Somewhere in the middle of those two scenarios was likely to be how the receivership played out, and Thomas warned that a further deterioration in the property market could make the outcome worse.
“(But) we haven’t done this lightly and it’s not a hand the keys back situation,” Thomas added. “We asked the Government and there was no other option but to do it the way it was done. But effectively it (Crown guarantee money) should be in essence a bridging loan.”
'Orderly wind up'
Equitable’s board and management had wanted to conduct an orderly wind up of the business rather than place the company in receivership. But, unfortunately Thomas said, under the Crown guarantee there was no mechanism for an orderly withdrawal. Representatives from the Auckland-based Equitable, part of the Equitable Group owned by the rich lister Spencer family, went to Wellington to explain their plight to the Government.
Thomas said they told officials there was no immediate need for a cheque to be written and that’s Equitable’s liquidity position could easily have seen it through to June next year. What the company wanted to do was cease taking deposits, withdraw its prospectus and meet payments in full as and when they fell due.
“However the Treasury’s advice was ‘we understand what you want to do and we’re very supportive of that. However, we’ve only got one mechanism and either you’re in the current (Crown) guarantee or you’re out of it,” Thomas said.
“So in the best interests of all stakeholders we had no other option but to ask the trustee to appoint a receiver.”
“The business is solvent and doesn’t have a liquidity issue.”
44% of core loan portfolio past due
According to its most recent prospectus, Equitable had a 58.3% debenture reinvestment rate in the three months to September. The biggest percentages of its NZ$189.9 million loan portfolio, secured by first mortgages and other assets, were in the land (24.8%), commercial (24.3%) and accommodation (22.6%) property sectors, with just 4.1% in development and 0.7% in residential.
The prospectus shows as of September 30, the value of core past due assets in the Equitable Property Mortgage Fund - including where interest payments have been in arrears for more than 60 days and total loan balances when principal is unpaid when due plus impaired assets - stood at NZ$83 million, or 44% of the total loan portfolio. That's up from 37% at June 30, and up from 27% at March 31.
Just under 14% of the loans were being repaid on a capitalizing interest basis when interest isn’t paid on a loan until the loan term ends, meaning Equitable was receiving regular cashflow from the bulk of its loans. Many of the property financiers to collapse in recent years, such as Hanover Finance and Strategic Finance, had big percentages of capitalizing interest loans on their books.
Thomas said that after “three years of headwinds” Equitable had formed the view that the property market would remain in a similar, or worse, state for another three to five years.
“So therefore we wanted to conduct an orderly wind up of the business,” said Thomas.
“We just don’t think that the business model’s there for property finance as a non-bank deposit taker.”
Asked how the property sector could fund itself if the debenture funded finance company model was dead Thomas said: “That’s the $64,000 question.”
In April KPMG noted in its annual Financial Institutions Performance Survey that of the 10 property development and commercial finance companies with total assets of at least NZ$50 million covered in last year's survey, only one - Equitable - was left with what could be termed "normal" operations.
Thomas said one of the reasons the property sector was struggling so much was because aggregate credit growth in the New Zealand economy was nil compared to historic growth rates of between 4% and 10% per annum. The latest Reserve Bank monthly figures show total lending to businesses fell 6.6% year-on-year to NZ$72.1 billion at October 31.
“So without that access to debt you normally end up with some sort of asset deflator and that’s what’s going on,” Thomas said.
Actual businesses who take tenancies were finding operating times tough meaning there were issues with surety of tenancies and there was little or no rental growth. And a low level of sales was causing valuation uncertainty on clearing prices.
“So you can turn around and say ‘this is what the price of something’s worth but if there’s historically been 4,000 to 5,000 transactions a year and at the moment we’ve only got 200 transactions a year, then you have to say 200 is not necessarily the correct underlying asset price and asset prices could be higher and they could be lower’,” said Thomas.
“If you go and talk to a (property) valuer, that’s the problem. They’re saying there is no true willing buyer-willing seller anecdotal evidence to give any sales comparisons.”
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