Underwrite scheme now open

The Government has announced that residential construction developers’ access to funding will be boosted via the Government’s Residential Development Underwrite (RDU) scheme – but not everyone is confident it’s the right move.

The RDU will be available to established companies delivering developments at scale (a minimum of 30 homes) and is designed to support residential construction activity in the near term, ensuring a supply of new homes to the market when interest rates drop and buyers re-enter the market. However, not everyone believes the scheme is targeting the right businesses.

Matt Stockman, director of Christchurch-based Stockman Construction, told Under Construction:

“I don’t know if it’s the best idea to fund an underwrite for big developments, as, in my opinion, it’ll keep finance away from companies that need it.”

“We’re residential housing developers, but we only build about 18 homes per year. This underwrite is aimed at big companies, which is a problem because that will lead to monopolies. Big developers will be able to buy up land, subdivide, and build the houses themselves, while we struggle to get finance. It’ll lead to smaller companies being pushed out of the market.”

“If this underwrite was aimed at helping the smaller businesses, I’d be all for it.”

Finance a concern

The Master Builders’ State of the Sector survey, released in August, echoed the issue raised by Stockman. Access to finance was cited by 83% of respondents as the biggest challenge facing the building and construction industry.

Master Builders Chief Executive Officer Ankit Sharma said that finance needs to be more available to all builders.

“Confidence is key to our recovery. We need businesses and clients to have the confidence that they can access money for projects, because it sends the signal that the economy is going to recover and that it’s worth committing to the building process.”

“Government has released a series of policies to address the housing shortage and the perennial issue of affordability, which will help in time. However, the highly conservative approach taken by the banking sector is a major barrier, especially given we can see the relief that an ease in interest rates will bring.”

A step in the right direction?

Sharma said that Master Builders supports the RDU as a whole and expects it to improve housing options in major metropolitan areas.

“We are encouraged by the Government’s new time-limited underwriting scheme for residential housing developments as a critical step towards restoring confidence in the sector, de-risking developments and ensuring developers can overcome finance hurdles and forge on with much-needed new builds,” he explained.”

“By focusing on larger developments with proven developers and the required consents, we expect this scheme will go some way towards speeding up key projects and improving affordable housing supply, especially in high population areas like Auckland, Hamilton, Tauranga, Wellington, and Christchurch.”

Government intervention

In practice, the RDU also reduces the risk faced by developers because Te Tūāpapa Kura Kāinga – Ministry of Housing and Urban Development (HUD) has committed to purchasing underwritten houses if they are unsold on the open market.

However, a spokesperson for HUD told Under Construction that “no development or stage will receive 100% of homes underwritten. This is to support the primary objective of the RDU, which is to maximize overall housing supply, while minimizing the risk and cost to the Crown.”

This isn’t the only condition the RDU has in place to limit risk and cost. For example, the HUD’s RDU Frequently Asked Questions document states that “developments offering more affordable housing, that need a lower percentage of underwrites and offer higher underwrite discounts, are more likely to be successful.”

Building and Construction Minister Chris Penk said developers must also have a proven track record of building and selling houses of a similar size and scale, as well as:

• Ownership or use of the land (or an option to do so).
• Have all the required resource consents for residential housing.

“In addition to providing a recent market valuation from a registered valuer, the developer must also be able to provide satisfactory evidence that underwrites are needed for the development to proceed within 6-12 months – for example, evidence that reasonable attempts have been made to market the development, that finance approval is conditional on pre-sales, and that the required workforce is available,” said Penk.

Interest.co.nz reported on one property developer interested in applying for the scheme. It had most of the presales but was struggling to obtain finance. Even so, the RDU would only be required for one or two units, said the developer.

A planned confidence booster

Penk added that the RDU is designed to boost the construction sector and increase confidence among builders and lenders.

“In times of expensive borrowing, underwrites are an effective tool for supporting housing supply. This is because underwrites increase developers’ access to finance, where they otherwise wouldn’t have been able to get it, and therefore wouldn’t have been able to deliver the houses.”

“The timing is right for this kind of support, because interest rates are still high and building consent rates low. The RDU will help support residential construction activity in the near term by enabling credible developers to access finance that they otherwise wouldn’t have gotten. This also has the benefit of ensuring there are houses ready to go for buyers, who enter the market as interest rates drop.”

“While the mood on the ground has started to shift with some encouraging signs of renewed optimism, the new underwrite will provide important support and confidence to the building and construction sector during a tough economic period.”

Reheated ideas?

While this isn’t the first time a government has underwritten the construction industry, there are some differences between the RDU and the underwrite introduced as part of KiwiBuild in 2018. For example, the RDU has no price caps or restrictions on buyers.

In Auckland, KiwiBuild’s price cap for a three-bedroom home was $860,000. It was $850,000 in Wellington, and $715,000 in Hamilton and Christchurch. These homes were only available to buyers earning less than $200,000 (couple) or $150,000 for individuals.

Labour’s housing spokesperson Kieran McAnulty said thousands of builders could have been kept in the workforce had National not scrapped KiwiBuild and BuildReady Development.

“Over the past few months, thousands of construction workers have lost their jobs. Maintaining a government underwrite through this period would have helped some of them keep their job.”

Developers can apply for support from the RDU now.

Click here to submit an application.