New Zealand Real Estate: a more liquid landscape

As the big four banks continue to resist the Reserve Bank's call for increased capital requirements, loudly complaining of the impact such measures would have on borrowing costs and the wider economy, other sources of capital are quietly arriving on our shores.

In recent history the acquisition and funding of commercial real estate in New Zealand, across the capital stack, has for the most part been dominated by local equity and "Australian" debt. However that is now changing due to for example; the greater availability of real estate market information, including better data driven by new technology; increasing acceptance of real estate as an investment class; large investment firms who participate in markets on a global scale; and, presently at least, due to the wall of capital looking for a home outside of crowded markets.

Latterly NZ has seen some chunky deals. Last year we saw Blackstone acquire a portfolio of seven office buildings for $635million and more recently Mansons TCLM kicked off 2019's real estate leader board selling an Auckland office for more than $247 million to an overseas pension fund. These new entrants add markedly to overall market liquidity and they also have undoubtedly had a waterfall effect on local equity. However equity is only half the story.

Of equal significance to the market is the ongoing arrival of "alternative" lenders to our shores. Alternative is perhaps a poor noun to use given the word has connotations of something underground, inexperienced or not generally accepted whereas the reality is very different. These new lenders include pension, life insurance, sovereign and other wealth funds from jurisdictions including Hong Kong, the US, Singapore, the United Kingdom and other financial centres around the globe.

Lending, or risk appetite, is equally diverse - the more conservative funds favour core assets with long term government leases, effectively annuity type lending which seeks to match obligations being driven now by changing population demographics. The rationale for this type of debt means however that it comes with the advantage of longer term loan tenors of up to 10yrs, significantly longer than the generic terms available from local banks, whilst also remaining competitively priced.

Other funds are more aggressive and more nimble, targeting niche areas of the market, depending on their particular cost of capital, with the ability to offer for example whole loans and higher overall LVRs. Such heterogeneous terms are especially helpful to investors now targeting value-add assets, where non-income producing hold periods and refurbishment is required to meet the more challenging IRR hurdles prevalent at this stage of the cycle.

Additionally just this last month it appears MaxCap Group out of Australia are to partner with locals Forsyth Barr and Bayleys to enter the CRE debt and investment space in NZ, and new proptech start-up Jasper, quietly setting up shop in the "syndication" space, who look to be emulating platforms such as Cadre out of the US, to "democratise access to institutional grade real estate". It will be interesting to see how they go and if the more advanced institutional market models now coming to the fore in other formal financial exchanges will also make an appearance here.

So, as the big four banks complain about the Reserve Bank's proposed increase to bank capital requirements, does it necessarily follow that the effects they describe, the higher borrowing costs and less availability of debt mentioned above, will result in all areas?

Or in recognising the huge opportunity NZ presents, given its paucity of lenders, might the rise of the alternative lenders, and a broader capital base from around the globe, make more innovative financial products from a greater range of providers available to the market?

Arguably such an outcome would be good for borrowers and should also contribute positively to overall market stability, one of the Reserve Bank's key aims and responsibilities.

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