Investment could be driven out of the New Zealand residential property market and into the commercial sector according to CBRE New Zealand.
Diggory Brooke, CBRE’s Director of Capital Advisors, says two major forces powering the financial landscape – new 60 per cent loan-to-value ratio rules and behind-the-scenes tightening of bank credit – could force the change.
He says these factors are having a profound market-changing effect and that the residential development market is looking a little shaky right now.
“Much has been written recently about the Reserve Bank’s plans to require most residential loans to investors to have a minimum 40 per cent deposit – and the lightening-fast reaction by banks to jump into line well ahead of the September 1 deadline,” he says.
“However, credit is still freely available for good commercial property investment.”
Brooke says that, at a time when the Auckland Council is under pressure to push harder than ever to create new apartments and houses, banks are tightening up credit rules for residential developers and buyers alike, particularly in the apartment market.
“So although the commercial property market is as strong as ever, the residential development market is looking a little shaky. The banks are nervous about all roads that lead to residential market right now – yields are low, prices are high and this is having a funding effect.
“Are we seeing a collision of two forces – new LVR rules and credit changes – with the potential to create a credit squeeze at a time of unprecedented housing prices?” Brooke asks, adding Auckland is being permanently re-priced by owner occupiers and investors alike as an international city.
“CBRE does not see a major correction coming in in residential property prices – what we are seeing is a cyclical tightening of credit lines inside the banks.”
That is being driven from Australia, given the banks’ ownership structure, he says. In cities such as Melbourne there is an over-supply of apartments and, “our Australian CBRE colleagues say that credit is being tightened up to prevent banking worries that might happen here.
“New Zealand banks are looking to de-leverage their inner city apartment lending, with some banks telling CBRE they are looking to fund no more inner city developments.”
Brooke says 8075 new apartments are in the pipeline for Auckland of which 4637 are under construction and 3438 are being actively marketed or have building consent.
“It does beg the question,” he says, “as to how this pipeline – some of which is not funded – will get finance. This is at a time when the council is pushing the development sector hard to create and deliver more projects.”
He believes new and largely unreported LVR guidelines – which will see lending to investors at a maximum of 60 per cent – will also have an impact on apartment purchasers, some of whom are also investors.
“Settlement risk is being taken seriously by banks to the point where debt coverage of 120 per cent through fully-vetted pre-sales is the new normal. This means some people who have purchased apartments off-the-plans in Auckland may struggle to settle,” he says.
While residential property will always be a favourite target for Kiwi investors, Brooke believes that, were the capital gain curve to shallow or bottom out, there may be a flight to large-scale commercial investment.
“One reason for this,” he says, “is that credit is very much available for commercial investment property. Commercial property offerings have never been stronger with yields lower than five per cent being seen across auction rooms. However there is, as always, a strong focus on quality assets.
“The New Zealand commercial banking sector is highly competitive and we are aware of margins as low as 1.15 per cent being charged in the race to secure quality clients.”
Brooke says another unintended consequence of the changes taking place is that non-bank lending – a sector that all but died in the aftermath of the global financial crises - is on the rise again.
He says inquiries in that area for both residential and commercial have risen markedly in the past few weeks, particularly in Auckland, and have been made to six or so dominant market players who have the capacity for up to $50 million for any one deal.
“There is still little in the way of inbound Australian funding lines and the NZ Superfund is giving no indications of becoming involved in direct property funding through specialist funding vehicles,” he says.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.