• The Reserve Bank of New Zealand announced this week that it will introduce debt-to-income ratios to support financial stability and house price sustainability
• This move will lead to an additional focus on income servicing by the major banks in their lending decisions
• There is likely to be little impact on our existing portfolio, as New Zealand asset valuations remain well supported and our loan-to-valuation ratios are conservative
• The additional focus of income servicing will limit bank lending opportunities to borrowers with quality assets but lower short-term income generating capacity, providing an opportunity for non-bank lenders to provide capital where it is scarce
• We continue to see exciting investment opportunities in the New Zealand market and our current 17% exposure will continue to grow over the medium term

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.