June 18, 2021

New Debt-to-Income measures in New Zealand will reinforce Merricks Capital’s competitive advantage


New Zealand median house prices have increased by 32.3% over the year to end-May, and this week the Reserve Bank of New Zealand (RBNZ) announced plans to implement macroprudential measures to support financial stability and house price sustainability. The RBNZ also released its analysis into macroprudential measures – including debt-to-income ratios and interest-only mortgages. The analysis showed that debt serviceability restrictions, such as a Debt-to-Income (DTI) limit, would likely be the most effective additional tool available to achieve its objectives.

The analysis also demonstrated that debt serviceability restrictions would impact investors most powerfully, with limited impact on first home buyers. The RBNZ believes that a DTI limit would be a complementary tool to mortgage Loan-to-Value Ratio (LVR) restrictions as they address different dimensions of housing-related risk; DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default.

The focus on interest serviceability has been a dominant feature of the bank lending landscape, both in Australia and New Zealand, and has been a key factor behind the retreat of banks in the commercial real estate lending market. The Australian agriculture sector has been particularly affected by the income servicing emphasis, with banks still assessing loans on the basis of historical farm incomes which have now recovered following the breaking of the drought.

By focusing only on borrowers with high levels of serviceability, quality borrowers with quality assets and projects often struggle to source funding from the major banks. In contrast, Merricks Capital has the flexibility to focus more on asset quality and valuation metrics, as well as borrowers’ strategic positioning and future income generation. This places us in a unique position to provide capital where it is scarce.

Following the successful repayment of our loan to the Van Leeuwin Group, the Partners Fund now has a 16.9% exposure to New Zealand, spread across the office, land subdivision, agricultural industrial, retail, and horticulture sub-sectors.

We also have a deep pipeline of NZ investment opportunities, including a $NZ130 million construction loan for the development of a hotel and high-end residential apartments in Auckland which is expected to settle later this month.

Overall, the combination of strong asset valuations and bank lending activity (or inactivity) mean that New Zealand is offering some of the most attractive risk-adjusted investment opportunities currently available and we expect our exposure there to grow over the medium term.

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