ANALYSIS: Prospects for property developers in the multi-unit sector continue to look negative, with some extra deterioration potentially underway. This is because of the now 21% rise in the number of properties listed for sale compared with the low reached in July last year. The total is the highest since late-2015 and buyers have plenty of choices in most parts of the country.
One way to measure stock availability is to compare the latest total with the long-term average. For the country overall, the number of properties which buyers can peruse is 14% below average. But Auckland stock levels are 15% above average while the rest of the country is 25% below.
In Auckland the outcome of the Unitary Plan has been to greatly spur densification and buyers have plenty of purchasing options – if they can raise the necessary finance. This raising of finance is where things are troublesome for the multi-unit developers.
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They are sitting on land which may have been purchased when house price growth was strong and demand for new builds was soaring. They’d like to build units and sell them as quickly as possible because the interest cost of holding the land is much higher than average as a result of tight monetary policy.
In fact, the main banks have plenty of grey-haired people who have been around through many credit cycles and they would have advised caution in lending to the many developers who grew strongly during the pandemic. This means many developers have had to rely on second-tier financiers to provide funding for their land purchases and these lenders typically charge higher interest rates than the banks.
To cover their debt-servicing cash outflows the developers need to sell what they’ve already built, are part-way through building, or would like to build. But buyers are wary following stories of cost escalations and cancelled contracts. They also have problems getting finance because of high interest rates and the previous government’s changes to the Credit Contracts and Consumer Finance Act in 2021. Plus, as noted above, they have plenty of already built properties which they can view and maybe purchase.
Independent economist Tony Alexander: "To cover their debt-servicing cash outflows the developers need to sell what they’ve already built, are part-way through building, or would like to build." Photo / Fiona Goodall
Developers are responding by offering various deals to try and get buyers to purchase off-the-plan or buy a unit near completion. But figures released by ANZ and Roy Morgan last week show that consumer sentiment has just fallen sharply. Affected no doubt by confirmation that our economy has gone back into recession and reports of layoffs in the public and private sectors, people are saying they’ve going to put their wallets even further out of reach.
For retailers this means poor sales and big continuation decisions for some. For developers it means the clock is ticking on the time their financiers will allow them to try and generate cash to meet their debt servicing obligations. Or, as a banker put it recently – “the rhino is staggering”. This means the effects of the cash inflow shortage are being felt and falling to the ground may be imminent.
I have no idea which developers are most at risk. But the fact that five have contacted me recently to enquire about me making presentations for them, accepting their advertising, and writing material for them when none ever have before, I take as my own anecdotal evidence that their problems are deepening.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
