Developers given credit for being market’s risk takers and creators

Developers often cop flak for their activities but few people appreciate what a vital cog they are in the commercial property market, Bayleys’ national commercial director John Church says.

“Property developers have often been the centre of negative publicity over the years with their multiple sins – ranging from allegations of vandalising the environment, through to blighting our cities and towns with poor-quality, unattractive buildings,” Mr Church said.

“Some of that criticism has been justified as development is an industry sector that has attracted its share of shonky operators.

“But there are other sides to this story that are seldom told. They play a vitally important role in the commercial property cycle across all sectors of the market.”

Speaking in Bayleys’ latest Total Property commercial and industrial real estate magazine, Mr Church said developers are behind the creation of office, warehouse and factory space, retail premises and leisure facilities without which we would not be able to function.

“Their development ‘contributions’  – effectively another form of taxation – also help provide the infrastructure required to get to these places and many public amenities that we tend to take for granted, “ Mr Church said.

“Perhaps most importantly, they are the risk takers, the creators and the visionaries – without whom there would be no built environment and no commercial and industrial stock for investors to buy and sell.

“Developers often face considerable obstacles and challenges with no surety of a successful and profitable outcome, and generally receive little thanks or recognition.

“The Property Council does an excellent job in supporting the sector through annual awards that recognise development excellence, and by lobbying on contentious issues such as development contributions and the Resource Management Act.

“But the general public rarely gives developers a second thought – unless of course one wants to build something close to their back yard at which point they can often become ‘public enemy number one’.

“Property developers can also be stymied by local and central government bureaucrats who police and enforce regulations to the letter of the law rather than facilitate or expedite development, or procrastinate over consent decisions.”

Mr Church said while commercial property market collapses, like that of the late 1980s and as a result of the Global Financial Crisis (GFC) are not pleasant for any participants, such events perform a useful function in purging the development sector of its flakier participants who tend to jump aboard a rising market.

“The development companies that have ridden out the downturn and are once again active are generally experienced and well-capitalised with good access to funding lines at competitive rates.

“With plenty of time still to run before we hit the peak again in the current upward cycle, it remains to be seen whether history repeats itself and we once again get the fly-by-nighters looking for an ‘easy buck’ helped by obliging financiers.”

Mr Church said in this respect, it was encouraging to note that the Reserve Bank was keeping a watchful eye on the property development sector. 

“In the Reserve Bank’s recently released Commercial Property and Financial Stability bulletin, the bank highlights that lending to the sector carries inherent risks which can undermine financial stability,” he said.

“The bank’s commentary points out that commercial property lending has been the main reason for large loan defaults during most financial crises – both internationally and in New Zealand.

 “However, the key conclusion is that risks associated with commercial property have declined post-GFC, because less leverage is being used to fund new purchases and developments.”

Mr Church said that while banks were again actively competing for commercial property business, funding is  tighter than before the GFC, with commercial property lending now typically capped at loan to value ratios of 60%.

“Banks are also restricting the ability of borrowers to further leverage themselves though additional mezzanine finance. Interest cover ratios have also improved as interest rates have declined and earnings have increased,” he said.

Reserve Bank data shows the non-bank share of total commercial property lending rose from 0.5% in 2000 to 17.5% in 2007, as finance companies competed with each other to lend to just about anybody at unsustainable interest rates, but that has since fallen to less than 2%.

An increase in equity buffers, along with the exit of risky deposit-taking finance companies from the sector, has reduced the direct risks to the financial system associated with development lending, the bulletin says. 

Moreover, the supply pipeline is forecast to remain well below that experienced before the late 1980s crisis and the GFC.

Mr Church said the bank’s Commercial Property and Financial Stability bulletin ends on a cautionary note. 

“The Reserve Bank will continue to closely monitor the commercial property sector. This should be welcomed by those developers who are in for the long haul and are mostly doing a vitally important job extremely well,” Mr Church said.

Bayleys’ latest Total Property magazine – featuring more than 75 properties and businesses for sale – hits the streets this weekend.

Neil Prentice writes for Bayleys Real Estate