Non-Bank Lenders Turning On The Funding Tap To Meet Housing Demand

Media Release - Monday 16 November, 2020

We are finally seeing the consequences of the Reserve Bank’s increased capital adequacy requirements, with the banks’ appetite for risk now muted and their focus on capital preservation more prevalent.

For property developers, it means constrained access to capital or limited access at a higher cost. For New Zealanders, it means an exacerbated supply-demand imbalance in the residential market.

Record low mortgage rates and the collapse in term deposit rates have helped to boost expectations for additional house price growth. When the international border eventually reopens, New Zealand will resume adding people via positive net migration which will further increase pressure on the housing demand-supply imbalance. The supply of ‘brownfield’ land ready for development also remains a hurdle in Auckland, with infrastructure investment continuing to lag demand for housing - particularly affordable, low-cost housing.

NZ’s housing crisis remains unsolved

Increased capital requirements imposed by the Reserve Bank last year are now making it harder for property developers to access bank financing. Since March, the banks have further retreated due to perceived heightened risks as a result of Covid-19.

While the RBNZ has delayed implementing its increase to banks’ capital requirements, the reality is that this is a short term fix so the banks are already preserving capital in anticipation of the higher capital requirements coming into effect. In addition, credit criteria has also become tighter due to uncertainty that has arisen through the pandemic.

So, there is more than one issue impacting the ability of retail banks to execute traditional property development transactions that they would have been happy to fund previously.

At the same time, migration-driven growth has increased the demand for new housing. RBNZ’s Financial Stability Report from November 2019 states, “a key driver of house price growth over the past decade has been strong population growth, which has outpaced growth in the housing stock.” Annual net migration has exceeded building consents in Auckland since 2013.

While our closed borders may have stemmed the flow of new migrants, returning Kiwis are driving some of the recent activity we have witnessed in the housing market. Young professionals with plans to move overseas pre-Covid-19 are now also making the decision to put down roots in New Zealand for longer.

With funding constrained for property developers, some are concerned that not enough residential housing and apartments will be built to meet the burgeoning housing demand.

Non-bank lenders stepping up to fill gap left by banks’ capital constraints

During the capital consultation process, the lending banks warned the RBNZ that further lifting capital requirements may increase the cost of credit, whilst also reducing its availability. It is therefore unsurprising that we have observed a reduction in the appetite of the banks to provide development funding following tightening regulation in the banking sector.

Non-bank lenders are increasingly able to fill the gap in the market left behind by the banks, by targeting lower risk investments traditionally covered by retail banks – effectively turning the funding tap back on for property developers.

While the Auckland Unitary Plan has been in place for several years, it took a while for property developers to assess and maximise the benefits that it provided in terms of increased yield. Experienced developers now have an understanding of the Unitary Plan and the ability for multiple terrace and townhouse developments to be accommodated on what were previously single house sites. Urbanisation and densification are a necessary and inevitable part of every city’s development and non-bank lenders will play an important role enabling the future growth of the Auckland metropolis.

It seems we are also seeing a generational shift in first home buyer demand for new houses on smaller sites, instead of the usual purchases of traditional “second-hand” housing on larger sections. Millennials appear less eager than their parents to take on the responsibility of maintaining large, time-intensive sections. Given new regulatory requirements, investors are also more likely to want to invest in brand new product to avoid potentially expensive remedial and or upgrades to meet new tenancy rule requirements.

Pearlfisher recently launched a new first mortgage fund, unique in New Zealand. The fund will help to address concerns around the increasing demand for residential housing by allowing property developers to access the finance they need to complete their development. The fund will target net investor returns of 6.0% to 7.5% per annum on invested capital, a significantly greater return than could be expected from a term deposit with one of the major banks in the current environment. Ultimately, funds like this will help to address housing affordability concerns by increasing the supply of new product at a faster rate.

The current non-bank market for development finance is estimated to be less than $2 billion, half the size of what it was pre-GFC, but with the traditional bank model under threat in the short to medium term there is room for growth in the sector to pre-GFC levels. There is already a well-established shift from traditional bank finance to non-bank funding in offshore markets such as Europe, UK, the US and Australia, and there is increasing evidence that the non-bank lending market will have an increasing and sustainable presence here in New Zealand.

Going forward, we can expect non-bank lenders to continue to offer more debt funding for property developers in the market, which should go some way to bridging the housing supply-demand gap.

New Fund on the Block: Pearlfisher Launches First Mortgage Fund

Media Release - Friday 6 November, 2020

Pearlfisher Capital, an experienced non-bank lender to the New Zealand property market, has announced it is launching a new first mortgage fund (“Fund”), of a unique kind for New Zealand.

The Fund will target lower risk property development and investment transactions traditionally funded by retail banks.

Pearlfisher Director Tony Abraham says non-bank lenders are looking to provide funding for property developers who have had the funding tap turned down by the banks. The company is aiming to become New Zealand’s market leader for non-bank property development and investment lending opportunities.

“There has been an observed and systematic withdrawal by the banks following tightening regulation, increased capital requirements and perceived heightened risks as a result of Covid-19, which has made it harder for property developers to get financing. Non-bank lenders are looking to fill that gap in the market.

“The new Fund will help to address concerns around increasing demand for residential housing, by allowing property developers to access the finance they need to deliver completed products.”

Pearlfisher is looking to raise $50 million, with a maximum fund size of $75 million.

The Fund will be targeting net investor returns of 6.0% to 7.5% per annum (pre-tax) on invested capital, a significantly greater return than what investors could expect from a term deposit with one of the major banks in the current low interest rate environment.

The minimum investment is $250,000 to eligible/wholesale investors.

Abraham says the prescribed wholesale investor fund will allow Pearlfisher to provide a prompt and nimble response to market demand and ensure a reliable and source of funds for qualified borrower’s.

The Fund will complement Pearlfisher’s existing investor base and typical investment, but will target lower risk opportunities.

Pearlfisher Director Jarrod Bruce says a shift to non-bank first mortgage funding is not new to the New Zealand market, but it is significantly more developed in overseas markets where non-bank debt represents a much higher percentage of the overall debt market.

“With the traditional bank model considerably constrained in the short to medium term, we are seeing clear market evidence of a shift to non-bank first mortgage funding, which is already well established in other offshore markets, in particular Europe, UK and the US.”

Pearlfisher has funded a variety of developments since its inception 11 years ago, including numerous residential land subdivisions, multi-unit town houses, high rise apartments and suburban retail developments. Up until now, funding had been on a deal-by-deal basis.

During the past 12 months, Pearlfisher has settled over $100 million of property development and investment transactions, despite the challenges and uncertainty caused by Covid-19.

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For more information on the First Mortgage Fund click here

Junior Lender in the successful Sugar Tree development

Linkedin - Wednesday 7 August, 2019

Pearlfisher is proud to have been a Junior Lender in the successful Sugar Tree development over the past 6 years.

Earlier this week Sugar Tree successfully settled its final Stage of the development with 250 + apartments changing hands in 2-3 days! Approximately 700 apartments, 400 car parks and + 3,500 sqm of retail were delivered over the past 6 years.

Congratulations to Darren, Catherine, the rest of the development team and all the consultants for an excellent job… Well done to Kalmar Construction who were the head contractor on all 3 stages.

To see the linkedin post click here

FNZC teams up with Pearlfisher Capital

Media Release - Friday 3 February, 2017

JV announced between property financier and leading NZ investment bank and wealth management firm

More capital for property development projects is to be a key outcome of a new 50:50 joint venture between property financier, Pearlfisher Capital, and leading investment bank and wealth management firm, FNZC.

The partnership between FNZC and Pearlfisher Capital (“Pearlfisher”), is FNZC’s first step into the direct property asset class and is one that will see Pearlfisher grow and enable co-investment in its lending activities alongside third party investors.

Pearlfisher currently offers funding to the market through high net worth individuals and trusts participating in transactions that suit their specific risk appetite. It also provides advisory and origination services including arranging traditional bank debt for its borrower clients.

Pearlfisher has funded a variety of developments since its inception six years ago, including numerous residential land subdivisions, multi-unit town houses, high rise apartments and suburban retail developments.

As part of the joint venture, FNZC will be represented on Pearlfisher's Board providing valuable additional governance and structure as well as access to a significantly wider funding base.

The principals of Pearlfisher Capital, Tony Abraham and Jarrod Bruce, say the partnership is an important step for the business and the industry overall as it is a change that will provide the potential for Pearlfisher to gain some considerable scale in the medium term and assist with the markets current non-bank funding constraints.

“Having our own capital to co-invest in projects will be an important development for the business, and will attract a broader and more diverse range of investors.

The partnership allows us to take advantage of the strong development cycle and consider a wider range of projects in a climate when the major banks are increasingly constrained by capital adequacy rules, compliance and tightening credit criteria.

The net result being we will be able to assist in funding more projects at a time when there is a demand for the delivery of additional housing.”

Managing Director, Head of Securities at FNZC James Lee says the partnership provides FNZC with an exciting growth avenue that diversifies its client offering into a market many of our clients do not currently have access to.

“Property remains New Zealand's largest investment class, for many of our clients it is their largest asset exposure. The macro trends of a structural under-build, record immigration and the recent changes in the availability of bank funding will continue to provide disciplined lenders, with attractive risk / reward opportunities.”

“From that perspective, this is a valuable opportunity for us. The team at Pearlfisher are highly regarded by some of our existing clients and the wider finance market and their strategy of being client first, transparent and disciplined in their risk assessment closely fits with our firm's approach of client focus and wealth creation.”