Prior to this year NZ experienced a sustained period of historically low interest rates and a bounding residential property market. Securing commercial property and/or development finance in that environment had been relatively easy as market conditions meant that many of the key bank criteria were easier to meet. However, this year has seen interest rates rise significantly, residential property values decrease, yields on some commercial properties soften, and demand for pre-sales in residential developments fall considerably.
On top of that, the Reserve Bank’s new capital adequacy framework has quietly come into play. The new framework increases the amount of capital banks must have. Increases in capital are being phased in over a 7-year period that started in July this year. What each bank needs to do to hit its target will vary from bank to bank, as will the means and strategies they employ to get there. However, a tighter availability of credit and a reduced appetite for risk will likely be among those strategies.
All of this means that borrowers may now be finding it harder to secure bank funding for development projects, commercial property purchases or even to rollover existing loans, on the terms or at the levels expected.
Some of the things that borrowers may now be encountering with banks could include:
However, banks will always be happy to fund good deals, particularly those with sound fundamentals and that are well presented to them.
The key message here is that, in the current environment, it will pay to be prepared. Get all your ducks in a row before going to the bank. The aim should be to make the deal as clean and as easy as possible for the bank to consider.
That could mean:
By understanding what banks require, and ticking the boxes, the deal will be more attractive and easier for the bank to approve. In the current environment, where some banks may be more selective over the deals that cross their desks, that may prove to be critically important.
That’s not to say there aren’t other options out there. We have started to see an increase in ‘non-bank lender’ loan instructions crossing our desks. For various reasons, including easier credit criteria or more flexible conditions, these are preferred by some borrowers, even though they are typically more expensive and are for a shorter duration.
Cavell Leitch’s property experts have considerable experience helping clients with their commercial property and/or development financing needs. We have developed strong relationships with all the major banks and can work with you and your lender to help get deals across the line.
If you need any help going through your property and/or development financing process, please get in touch.