James Kellow, director of NZ Mortgages & Securities, runs and half-owns one of this country's largest residential development funding businesses. He talks to New Zealand Herald property editor Anne Gibson

How hard is it for developers to build big housing projects?

Planning, creating and delivering a large-scale housing project is all-consuming for the developer/project principal and often the project financier.

It is difficult, but probably not different to any other business transaction of $100 million or more. There is a lot of money involved and with housing you have the added responsibility that you are creating people's homes, or for investors, their retirement income.

So you think a lot about the built environment and try to get that right. The key message is that with any $50 million-$100 million project it will be hard and you need more than a good finance partner. You also need to employ specialist planners, quantity surveyors, engineers, architects and project managers. People with experience who are not scared of working to a larger scale. Once you have successfully completed a number of large projects it becomes a little more cookie-cutter -- but there are always little surprises to watch out for.


New Zealand Mortgages & Securities (NZMS) have never backed an unsuccessful project. We like to think this is the result of experience and expertise -- not luck.

What are the impediments in terms of funding?

I always think that if a developer can create a project in a reasonable location, of good design that will be desirable to purchasers and tenants and with a sound profit margin (to cover unforeseen cost increases and risk), then the funding part is easy.

I have never been involved in a good project with sound level of presales and margin that has not been able to find the funding.

The biggest impediment to funding is that the project is simply not good enough. Buyers are very smart, and simply won't pay up for substandard development product.

How much would you loan to this sector annually?

Many developments take longer than 12 months so this is a hard question to answer accurately. In a normal year we would like to lend well over $100 million split between first and second mortgages.

A $20 million second mortgage normally has $80 million of bank debt as first charge holder, so $50 million of second mortgage mezzanine is roughly $250 million of total project funding.

This year we have projects completing with gross realisation of well over $300 million but it will be a larger than normal year. NZMS has no real funding constraints. When there are sound property deals to invest in, we will take as much as is available. When the opportunities slow down, the funds are invested in other areas. We have a preference for backing winners, projects with good momentum -- so we don't do every deal, just the ones we know will work out well.

Why do they come to you when banks fund a lot?

We work in with a bank. A bank will typically fund between 70 and 80 per cent of a project's cost. On a $100 million development there is more than $20 million of hard equity required.

Most Auckland developers do not have this much cash readily available so we can provide this equity with a second mortgage called mezzanine finance, often up to 100 per cent of the projects cost. On our first mortgage deals we are often able to provide property development finance with no presale requirements. When an experienced developer is able to lock in a sufficient percentage of the project sub trade, we are able to fund without a fixed-price head contractor.

NZMS can approve a finance facility within hours if all of our directors are available.

It is this speed, that adds to a project's momentum, that many borrowers prefer. They may pay a bit higher total interest but get the development started (and finished) sometimes months earlier.

What interest rates and terms do you loan on?

Interest rates for first mortgages normally range from 7 per cent to 11 per cent depending on loan size, term and level of risk.

On a development loan the funds are drawn monthly as the building progresses, so the facility is only fully drawn for the last few months of the project before the presales settle. So higher interest rates are not necessarily a large part of a project's costs.

On our second mortgage mezzanine funding the rates or fees are higher, but with 80 per cent of the loan provided by bank funding at (say) 6 per cent the average interest cost is similar to our first mortgage loans.

Name some of the big projects you are funding now?

I like to talk about projects that are well advanced and you can actually see them rather than being in the planning stages.

NZMS funded projects completing this year are:

• Urba Apartments -- 143 apartments at 5 Howe St, Freemans Bay. Completed value is $70 million. Purchasers start moving into their new homes this month (May).

• Queens Residences -- 281 apartments and retail just behind Queen St between Wakefield and Airedale Streets. Completed value is $130 million. Purchasers start moving around June.

• Belmont Residential Estate, Pukekohe. Approximately 350 residential sections within a new Special Housing Area (SHA) with 10 per cent of the lots covenanted as affordable housing. The first 70 sections are complete now with house building to start next month and we are anticipating to have a total of 300 sections finished by Christmas. Total gross realisation of sections funded by NZMS will be $105 million.

Many of the larger deals are for borrowers that NZMS or the company's principals have known for many years.

We are always happy to help with small transactions from $3 million as we have learned that with our support and expertise, borrowers can grow to undertake larger projects in the future.