The current economic downturn has resulted in many residential housing developers being unable to secure funding to proceed with their projects. Typically, lenders require developers to have achieved a certain level of pre-sales before agreeing to provide lending. Recently, this has been difficult for many developers to achieve. That, in turn, has led to a reduction in the number of housing developments proceeding - at a time where the construction of new residential homes in New Zealand is much needed.
The New Zealand Government has recognised this, and has introduced a new “Residential Development Underwrite” (RDU) programme offering support for certain housing developers. The RDU provides a commitment from the Crown to buy homes within eligible developments (up to a specified number), if the developer cannot sell the homes on the open market after an agreed marketing period.
This Government underwrite is intended to help banks and funders feel confident in lending to developers and enable developers to proceed with their projects. Housing Minister Chris Bishop said the plan would lower the risk for developers and ensure dwellings were ready for buyers to enter the market as interest rates drop.
Applications for the RDU program can be made by developers through Te Tūāpapa Kura Kāinga – Ministry of Housing and Urban Development’s (HUD) website.
How does it work?
The RDU will only be approved for developments that deliver significant housing supply (appropriate for the location), have good financial feasibility, reasonable developer equity input, and are in locations where buyers want to purchase. They must be low cost and risk to the Crown. The development (or if the development is staged, the stage which is the subject of the underwrite) must have a minimum of 30 dwellings.
The RDU is targeted at high population areas such as Auckland, Hamilton, Tauranga, Wellington, and Christchurch, but other locations will be considered. Developments which rely on 100% of dwellings to be underwritten will not be accepted.
For successful applicants, HUD will agree to purchase the underwritten dwellings if the developer is unable to sell them on the open market after an agreed marketing period, provided the terms of the underwrite are complied with.
The “underwrite price” will be at a discount to market value, to incentivise developers to sell the houses on the open market and not rely on the underwrite. The market value of the houses will be determined by a registered valuation process.
If an underwrite is triggered following the agreed period and satisfaction of relevant conditions, HUD will purchase the underwritten dwellings and on-sell them either as market, affordable or social housing, including to Community Housing Providers, iwi or other providers.
The RDU is different to Kiwibuild in that it has no buyer restrictions and no price caps. This is intended to enable a wider pool of buyers, reducing the risk of underwrites being triggered.
Eligibility criteria
Only applications that meet all the eligibility criteria will be considered by HUD.
The developer must:
- be an established residential developer with a proven track record of successfully building and selling dwellings of a similar size and scale;
- have ownership or use of the land (or an option to do so);
- have all the required resource consents for residential housing;
- provide satisfactory evidence that underwrites are needed for the development to proceed within six to twelve months (e.g., evidence that reasonable attempts have been made to market the development, finance approval is conditional on securing pre-sales, and there are workers/subcontractors available); and
- agree to provide a recent market valuation from a registered valuer, which may be required to be updated in due course.
HUD will also conduct a due diligence exercise before assessing applications.
Assessment framework
HUD is anticipating a high level of interest in the RDU. Developments that can deliver the most dwellings with the least risk and net cost to the Crown will be given priority. This means that developments with lower underwrite prices for the dwellings, and fewer proportion of dwellings needing to be underwritten, are preferred.
HUD has published a detailed assessment framework (available here), to help it consider proposals that best meet the RDU’s objectives. Developers are encouraged to self-assess their proposal against this framework. HUD will assess all the information provided to determine the likelihood of triggering an underwrite within each of the criteria.
Assessment timeframes
HUD anticipates that applications which meet the RDU’s objectives will take approximately 18 weeks from submission of the application to execution of an underwrite agreement by HUD. Timeframes may be longer for applications which do not meet the RDU’s objectives, or if HUD requires additional information.
If you require any further information on the RDU, or assistance with preparing an application for the RDU, please get in touch with the contacts listed or your usual Bell Gully adviser.