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Debenture funding for property sector ‘dead’

The non-bank sector's exposure to property development is likely to remain "greatly reduced" and the model of retail funding for high risk exposure has proven to be unsustainable, according to the Reserve Bank's Financial Stability Report.

Wednesday, November 10th 2010, 8:27PM

by Benn Bathgate

The report's comments were echoed by Finance Direct managing director Wayne Croad.

"Debenture funding for property development is dead, mainly because there's no regular cash flow," Croad said.

The report says future funding for property development projects will require "new funding models better suited to the financing of higher risk jobs" such as private-equity backed vehicles.

Savings & Loans managing director Scott Masters says that while there has definitely been a reduction in non-bank lending for property development, demand will remain.

There is "always going to be a requirement for it" Masters said, particularly from smaller developers.

"Small property developers who still want the flexibility of short term bridging loans," he said.

Masters says that the sector as a whole is in something of a Catch 22 situation at the moment.

He says that "demand has gone up" for credit, but with less bank and wholesale lending, there simply isn't the money to go around.

"The credit crisis hasn't gone away."

Despite its bleak prognosis for the non-bank sector's role in the property market, the Reserve Bank notes the importance of the sector for the wider economy.

"A strong non-bank sector is an important part of a sound and efficient financial system, particularly given the role of the sector in financing activities that banks traditionally have not been involved with," the report said.

Both Croad and Masters are optimistic about the sector in the wake of recent consolidation - a process both believe will continue - largely driven by increased regulation compliance costs.

Ahead of the new Reserve Bank regulatory regime coming into force on December 1 2010, which will introduce new requirements on capital levels, liquidity regulations and governance requirements, "regulation costs have increased substantially" Masters said.

 "Existing deposit takes will need to grow to cover compliance costs," Croad said, adding that non-bank companies will need to branch out to secure additional cash.

"The challenge for us is to grow into the [regulatory] scheme."

"Consolidation in the non-bank sector has sifted out most of the weaker institutions," the Reserve Bank said.

"The majority of the institutions remaining in the sector are those with stronger capital positions and better risk liquidity management practices."

Both Croad and Masters agree.

"If you've weathered the storm you've got a robust business," Croad said.

And according to Masters, "Everybody that's survived the last three years has done something right."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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