That’s according to Peter Thomas, ANZ property, corporate and commercial banking head Peter Thomas.
ANZ National Bank is one of New Zealand’s largest commercial mortgage lenders with more than $6 billion in commercial mortgages. Across both brands, 90% of the bank’s total commercial property loan book is with its business banking or corporate and commercial banking divisions.
Mr Thomas said construction risk should sit with the builder, not the developer; the developer must shoulder some risk; and every proposal must have a clear and certain exit strategy at the outset.
Mr Thomas is responsible for the specialist property and construction finance business unit, and co-ordination of the wider commercial mortgagelending book across both corporate banking and commercial banking.
He said that as real property prices and GDP were closely correlated, he expected the commercial market to broadly follow the general economy, which was likely to be more subdued over the next two years. But he thought the commercial property market would remain a relatively stronger performer compared to other industry sectors. This was because "capacity utilisation” in the economy remained at high levels, which had helped underpin commercial property prices. Overall liquidity was firm; rents were yet to catch up with yields, (net rentals were still below those set in the late 1980s); there was a shortage of quality stock and globalisation was evidenced by the flow of funds entering the domestic market from Australia.
However, Mr Thomas said these advantages had to be offset against the risks – the potential for a classic hogcycle to eventuate (too much supply); and businesses facing increased margin and profitability pressures, which would limit some of the upside in rental growth.
"When pitching a new property proposal to the bank, it helps potential borrowers to understand the approach a bank takes in assessing the risks of a property transaction, and thereby the clients increasing their chances of success.
"Historically, banks only looked at a property under the five-Cs credit framework (character, capacity, capital, conditions and collateral). But these traditional risk measures let many banks down in the early 1990s. So today we use a more specific risk assessment framework.
"For example, in the case of a development deal, a bank would typically look at:
- market risk: property type and location; historical and projected sales, volumes, rental, occupancy and prices; level of pre-sales and/or preleasing; and product quality
- sponsor risk: experience and track record; ability to meet cost over-runs; and experience of the project management team
- financial risk: loan-to-cost and loan-to-value ratios; and form of equity contribution (true or subordinated mezzanine debt)
- delivery risk: experience, capability and financial standing of the contractor; form and documentation of the construction contract; and exposure to time and/or cost overruns.