Long-term development funding options needed

He says most lenders have 12 to 24 month products and mortgage advisers say there is definitely an opening for a long-term commercial product, particularly as development funding is difficult to obtain.

“Small scale construction development finance is practically non-existent after banks and non-bank funders pulled the plug because of the perfect storm 18 months ago when rising interest rates, falling house prices, increasing construction costs, the Gib crisis and few pre-sales for development projects all hit at the same time. It made funders nervous.”

Before that Stevenson, who has become a Funding Partners business development manager after two-and-a-half years as a specialist loans analyst for development and construction funding, says the firm was doing a “fair bit” of development lending and managing projects through to completion. “Most of the funders we were working with have exited the market over the past 12-18 months.”

Stevenson says despite plateauing interest rates, slowly rising house prices and falling construction costs, development and construction funding is still difficult to get.

He gives an example of a loan application he has been working on. The application has a low loan-to-value (LVR) ratio on a high quality Remuera property as security. His clients have a strong net worth and asset base, but can’t get bank funding for a short-term $300,000 loan – basically an equity release – for development purposes. 

“They want to capitalise the interest, which banks and many non-banks are not doing. It seems like low risk, easy lending, but for whatever reason banks have pulled back on this type of lending.”

Stevenson says if his clients can’t get bank funding they will look to the non-bank sector and if that is a no go, it is probably a lot more difficult. “Given the strength of the deal, there will probably be non-bank lenders falling over themselves to have this sitting on their books.”

Even though funding is drying up he is still getting at least two inquiries a week from mortgage advisers trying to get their hands on small scale development funding.

“There are definitely developers who want to get back into it. The industry is in a bit of a ‘funny phase’ with developers usually taking a wait and see approach before an election and then kicking back into gear after that. That didn’t happen after last year’s election, even though there is a demand for houses. People seem to be generally “cagey” about the OCR track and the state of the housing market – which is often seen as boom and bust.” 

He says there may be a couple funders still active, but most people are saying they cannot get bank or non-bank funding for developments of three to 12 units. “They are either developers who have done a couple of small scale projects in the past or mum and dad developers, who want to knock down their house and replace it with two or more units. The sweet spot seems to be development of 400-800m2 sites with the aim of building homes of about $800,000 that fit into the first home buyer category.

“It’s not helping the country’s housing stock when these types of developments can’t go ahead,” Stevenson says.

Funding Partners says Stevenson’s experience and knowledge means he is able to support advisers who aren’t sure how to package a commercial deal or know what information a lender requires to understand the transaction.