Alpha First Newsletter – June 2022
This letter is to keep you up to date with the lending activity at Alpha First and our view of the property market and the outlook for the lending landscape.
Presently the New Zealand housing market is the subject of great speculation and prediction by a wide range of commentators and stakeholders.
Is the trend of declining prices likely to result in a drop of 15%, 20%, or even 30%? Only time will tell however at Alpha we have factored in 20% when assessing new loan applications that involve building residential houses.
Demand by house buyers is being severely constrained by increasing interest rates (serviceability) deposit requirements by banks, and the general uncertainty around the future value of houses. FOMO is a thing of the past.
Suppressed buyer demand, inflating building costs, delays with material supplies, delays at councils and the titles office are all challenges that must be factored into lending decisions.
It is impossible to predict where the property market (including all sectors – development land, farms, commercial/industrial, tourism and housing) values will be relative to today when trying to predict 1 year or 2 years out from now. There are just so many factors influencing demand and property values.
What is happening in Ukraine is having a direct impact; when and how will that end? The effect of the war on fuel prices may push oil prices up to $150+ per barrel. That converted to NZ pump prices is $3.80+ per litre!
So, what is Alpha First doing?
Our approach to lending is much more conservative currently than it was just 6 months ago. Specifically, we approve very few loans with a Loan to Valuation Ratio above 50% unless there is collateral security available.
For loans for construction of houses, townhouses, and land development we require unconditional pre-sales sufficient to either cover the total loan amount if possible, or in some cases up to 60% of loan amount, depending on location and our assessment of salability during the loan term, the valuation of the completed project etc.
Construction contracts are required to be fixed price and a Quantity Surveyor report certifying total project costs is generally mandatory. Due Diligence on the building contractor is carried out.
Whereas in the past, loans where construction was involved, we favoured a 12-month loan term, that now needs to be 15 months where multiple units or sections are involved.
Applications for new titles are currently taking up to thirty (30) working days before titles issue; the accepted standard pre-covid was ten (10) working days.
Some of our current loans have required extensions of the loan term for reasons outlined above, and this has been supported by investors in the loans in every case where Alpha has recommended an extension of time.
Interest rates for new Alpha loans have risen on average 1% this year in line with other lenders in the non-bank sector. Just where a loan interest rate is struck in our range of 8.5% to 9.5% depends on our assessment of risk, the loan purpose, location, the borrower’s repayment strategy, strength of the guarantees etc.
- Last year to 31st December the average return to investors across all loans was 8.25%; in the current year we expect that average to be 9%+ (before RWT).
The quality of loans available to Alpha First continues to be excellent, partly due to a shortage of credit from other banks and non-bank lenders, and also due to the increasing influence in the market of our related company, Omega Capital as a commercial broker which is one of the main generators of our new loan business.
Our loan book as at the 31st May 2022 was c. $150,000,000-00 covering 60 loans.
However to our investors real benefit, and one of the great strengths of the way Alpha First generates returns for investors, is that we are not pooling investor funds so we are not placed under any pressure to lend, with the result being that the quality of our loan investments remains strong.
The Blake Trust and Variety The Children’s Charity both continue to receive our monthly support. Variety having reached out for their Warm Hearts Winter Appeal recently to provide new warm clean bedding for children in New Zealand, a cause that is very worthy to improve the health of the most vulnerable children over winter.
As always, if you’d like more information on our investment opportunities please contact us. There is no obligation and your discussion with us is always confidential.
Scott Massey and Olivia Fraser