Funding for new commercial property and subdivision development has virtually dried up as lenders close the door on the riskier end of the market amid fears of fallout from the coronavirus pandemic.
John Bolton, managing director of Squirrel Mortgages, said lending had tightened up massively as the whole country went into lockdown.
While banks were always more averse to lending on property development, Bolton said even the non-banks were not lending.
"This isn't just a bank thing, no one is doing development lending at the moment," he says.
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"I am looking at one at the moment where it is impossible to get finance."
Bolton said until lenders could accurately assess the risks they wouldn't lend.
"It is the first part of the market to go through a credit crunch," he says.
Bolton said previous economic cycles had shown property development was one of the highest risk areas to lend to and the first to have the plug pulled on it.
After the Global Financial Crisis, many finance companies that lent on property developments collapsed and were unable to pay back money to retail mum and dad investors.
Bolton pointed to the lack of cranes after the GFC between 2010 and 2012. "They really only came back after 2015."
He said it was less likely that lenders would pull the plug on developments that were halfway through, with those most at risk being developers who had borrowed to buy the land in the hope of making money through a subdivision.
"We might see people who have already bought development property just won't build in this market. It might be because they decide not to build or it could be because they just can't get funding.
"Typically where we see real risk is around land development."
Bolton said developers could end up in a difficult situation if they couldn't service the debt, no one would buy the land off them and they could not get funding to turn it into sections and houses.
"That is typically when they start to lose their shirts - they have debt and can't service it."
Bolton predicted that could be another six months away.
Banks say they are continuing to lend to existing clients.
An ANZ spokeswoman said: "We continue to fund commercial property development and subdivisions. In the current environment our focus is on supporting our existing customers with funding for this kind of project."
A spokesman for BNZ said it had recently confirmed funding for several commercial residential projects around New Zealand.
"Our immediate focus is more on our existing customers and the opportunities they have that support housing growth in New Zealand, depending on the borrower, the proposed development, the sector, and location.
"With the uncertain economic outlook with the impacts of Covid-19 on the property market, we are taking a prudent approach to new lending to ensure we deliver the best and most responsible outcomes for customers."
Bolton expected funding to eventually settle down again but said developers may have little choice but to hold on as best they can in the meanwhile.
"The question is at what point will lenders start to relax a little bit?"
James Kellow of New Zealand Mortgages and Securities said the business had $223 million of approved facilities, $168m drawn and was still lending to existing clients.
Since alert level 2 came into force this month, NZMS borrowers had settled $33m in townhouse and apartment sales and were continuing to repay loans, Kellow said. The Ponsonby-headquartered business was continuing to fund new projects, in addition to monthly loan drawdowns on 19 existing projects where loans were approved.
NZMS had loaned $25.6m to clients for four new property projects since the alert level 4 lockdown started in late March, he said.
Asked if NZMS continued to lend, he said: "Yes, to existing clients. There is quite a high bar to become a borrower. Because we lend a very high percentage of costs, we need confidence a developer will finish the project and get houses to their buyers. Taking on a new borrower would require them to have a good experience because we want to keep our loan book of good quality. We have a pretty high market share of the larger Auckland townhouse developers."
Another second-tier lender said property developers getting trading bank loans were charged about 4 per cent but he charged 12 per cent annual interest and loaned up to about $10m for 12 to 15 months, mainly on residential development projects, "long enough to build the places and sell them".
Low interest rates were driving a rising appetite for new subdivisions, he said, citing an $800,000 house where the buyer had a $100,000 deposit and paid about $18,500 a year, equating to just $400 a week in mortgage payments for the same place which cost at least $600 a week to rent.
"Major trading banks are just doing the right thing, being so cautious, looking after their shareholders," he said, citing ANZ, NAB and CAB share price slides of about 40 per cent since February.
Many New Zealand mezzanine funders continued to lend but would question loans requested for new hotels or shopping centres, he said.
"Everyone is being super-careful. We all stopped lending when the pandemic hit because we didn't know where this was going. But if you're an existing client and you have a sound transaction, the major trading banks will work with you on it," the lender said.
"Major trading banks are very focused on their margin. Kiwibank is the most willing to lend but the other trading banks in New Zealand are very similar. With requests for loans on office developments, banks will look at who the tenants are - their financial strength," he said. Lease length and quality of the project were other factors.
He named eight mezzanine financiers who he thought would now be willing to lend around $10m to $15m.