Developers: know your target audience

As any developer will know, banks across New Zealand have dropped a couple of belt sizes in the recent years. They’ve moved rapidly from the binge eating of the 5 or so years between 2011 and 2016 straight onto the no-sugar diet. Let’s just hope it doesn’t lead to a sugar crash!

On top of that we have also seen lending standards tighten across the board, mostly for good reason but not without an impact on developers. Speaking to Property Finance bankers at the moment, every single one highlights pre-sales as the road block to them providing development finance.

A lot of developers have good projects, top consultants and a steady head contractor in a great location, but just can’t achieve the pre-sale requirements of the banks. Without the pre-sales they can’t trigger their funding and without their funding they can’t get the ball rolling.

There are many factors to the pre-sales with the tightening lending standards mentioned above being one of the problems. What I want to focus on here however is understanding your target market and building for that demographic.

As you undoubtedly have seen in the press there is a housing shortage in New Zealand, particularly in Auckland. What isn’t often spoken about, unless we are talking about the KiwiBuild farce, is the type of product that the market craves.

First home buyer activity

Currently about 1 in 3 sales in Auckland are going to investors. Capital gain has slowed right down and most investors are reducing their exposure, looking at commercial or sitting on their hands. The real active players in the market at the moment are first home buyers.

These are people who are often young couples without kids. In most cases both are working and are on salaries that far outstrip their deposits. Whilst on the face of it they may both be able to afford a more significant mortgage, they don’t have the equity to jump in on the $1m home.

First home buyers often go for 2 - 3 bedroom properties in decent locations with low maintenance. They typically don’t want a big yard, garden and pool. Rather, they want a decent kitchen, proximity to amenities and a decent living area. The Kiwi dream is quickly moving generationally away for the traditional half acre and more towards decent homes with low upkeep.

Banks will come to the party for these purchasers as well, embracing the positive press that comes with helping first home buyers. They see this opportunity as similar to providing you a first bank account and securing a customer (and income) for life. Banks will often lend up to 90 – 95% for first home buyers and seek to find solutions.

The sweet spot

The fastest moving properties in Auckland are in the $550,000 - $700,000 bracket and these are moving to first home buyers or other owner-occupied property purchases.

Consider the above when looking at the next development and remember that you make your money on the way in and not the way out. Get it right up front and you will have a much smoother process both with the actual development but also your financier.

As always, get hold of a Squirrel Mortgage Broker if you are considering development finance – we're more than happy to help out!

You can always use our mortgage calculators to get idea of how much you can borrow and what your repayments would be.

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