After a prolonged and deep recession, New Zealand’s funding landscape and housing market look very different from what they did a few years ago.
If you’re looking to kick-start a development in the current environment—whether it’s completing an old project or starting fresh—here are the key opportunities and challenges to consider.
Scenario #1: You’re stuck with land you paid too much for at market peak.
If you’ve overpaid for land, potentially by as much as 20% to 30%, your biggest challenge will be profitability.
You could offload the project to someone else (probably at a loss) but the more palatable option for many is to forge ahead, accepting lower returns.
Be careful. As humans, we’ll typically choose a slow, small profit or loss over taking the hit quickly and realising the full cost of a bad decision. Forging ahead means having capital tied up in a low-yielding project, and you need to assess the opportunity cost to that—how else could you utilise that capital? When looking at options, always exclude sunk costs.
It's still possible to fund low performing projects, but you’ll either need significant equity, or a solid level of pre-sales. And in the current housing market, pre-sales are much harder to come by unless you have a unique product.
Scenario #2: You’re looking to buy a project from someone in Scenario #1.
Pursuing this kind of opportunity typically only makes sense if there’s some sort of “hook” to it i.e. you’ve spotted a better, more profitable way of using the land. The existing owner planned to move a couple of relocatables onto the site, but you’re looking to do a townhouse development instead. That sort of thing.
If you can negotiate a good price, it may be worthwhile buying a development and forging ahead as planned. Often though, if the original developer has missed something (i.e. you can get more units on the site) the consent will need to be reworked anyway.
Scenario #3: You’re starting fresh.
With house prices down 17% on average, today’s land prices are much more reasonable, and there’s not a lot of competition. It’s a good time to be sourcing new projects.
Previously, funding was largely contingent on pre-sales—sometimes up to 70%-80%—but credit conditions have eased significantly, and it’s now possible to get finance across the line with no pre-sales at all.
The key metrics are profitability and equity. As a general rule, lenders will go to a maximum LVR of 65%, which means if your profitability is 25% of development costs, you’ll need to front up with 10% equity. We are getting clients approved with less than 10% equity in good projects.
The importance of good advice
You can pull lots of different levers to make development funding work—and it’s possible to get funding on projects with no pre-sales, lower profitability, or up to 70% LVR. So, it’s important to seek quality, tailored advice.
Squirrel works with both banks and non-bank lenders to fund larger projects, and we have our own unique funding solutions for projects up to $3 million—so get in touch to find out how we can help.
