After more than 25 years in the business, we’ve outlived a lot in the New Zealand market.
We take a conservative approach to all risks and always lend our own money first.
But there are still risks involved with the business we operate. Below we have outlined what we believe are the main risks.
New Zealand has a strong and stable economy, but we are not isolated from global issues. Some countries presently have very fragile economies and some of these are significant trading partners of New Zealand. The weakness and even failure of some global economies will have an impact on New Zealand, although it is extremely difficult to gauge the strength of that impact, as there are a lot of disparate factors involved.
Not only do some countries have significant issues to deal with, but some major global financial institutions have major issues to deal with as well.
The potential impact of failures or global recessionary forces should not be underestimated, but just how far-reaching impacts could be on New Zealand is unknown. Negative impacts could be seen on housing demand, house prices, employment levels, interest rates, supply chain etc.
The short-term nature of our lending and investments, as well as the fact we have security over every borrower’s property, may help to limit your exposure. However, the negative impacts described above could result in a shortfall in the borrower’s loan repayment and you may not receive full investment repayment.
Property market shifts will always be an important topic of commentary in New Zealand.
For the year ended January 2023, 49,480 new dwellings were consented. This is up only 1.4% from the year ended January 2022. In fact, New Zealand’s consent rate for standalone houses fell by the largest amount in more than a decade in the year ended January 2023. This could be a sign new builds are losing their popularity as the housing market cools and buyers look to purchase existing properties. House prices are more than 16% lower than their peak in November 2021.
Changes are also being reflected in the construction market with inflated construction costs, extended completion timelines, additional rental requirements, and increased interest rates.
Ultimately, everyone has their own views on the market which impacts how people make investment decisions. We must remember to look at the global economy and macro-economic forces, equally to domestic.
It is within your power to select investments you feel comfortable with and fit your own requirements and financial planning.
In making investment decisions you should remember that a negative impact on the market could result in a shortfall in the borrower’s loan repayment (from a borrower default, negotiated lesser repayment amount or mortgagee sale) and you may not receive full investment repayment.
Your investment interest is paid from the interest a borrower pays on their loan. When a loan is first provided, we undertake checks to ensure a borrower can meet their loan payments without creating hardship, and in fact we have a legal requirement to do this.
Whilst every care is taken, we have no control over the future, and have no idea what may happen with the economy or borrowers’ individual circumstances.
If a borrower is unable to meet their loan payments, we do have the property security to fall back on (not only for the principal owed, but also for all outstanding interest and costs). We have the legal right as first mortgage holders to issue a Property law Act (PLA) notice. However, if the borrower’s circumstances or the property value have changed to such a degree we cannot recover the full loan amount from the borrower or via mortgagee sale, your investment may be impacted by the shortfall and you may not receive full investment repayment. Read more about PLA notices and how any shortfall is handled here
Valuing property is not an exact science. It is simply one person’s opinion of value on any given day, depending on the circumstances applicable at that time. Some people are more qualified to have an opinion, and certainly have access to far more data and trends (for example, registered valuers).
We all know values change over time, and certainly during the past few years those changes have been stark. However, you need to be cautious about quoted statistics and trends, as these do not look at individual properties, where values could conceivably be influenced by more local factors (for example if a proposed motorway through the backyard gets planning approval). We try and keep an eye out for these types of things, and if we know of any negative impact on the valuation, we will always ensure these are accounted for in valuations and make investors aware of any issues.
This is why we look at multiple valuation sources as it gives a wider opinion on value. However, we will not always know of factors which might negatively impact the valuation of a borrower’s property. You should keep in mind where those values are coming from, who is doing them, and how old they are.
Factors which negatively impact a borrower’s property valuation could result in us not being able to recover the full loan amount from the borrower if they are in default or via mortgagee sale. Your investment may be impacted by any shortfall, and you may not receive full investment repayment.
After historically low interest rates, New Zealand’s Official Cash Rate (OCR) and subsequent interest rates are on the rise. You need to consider if you’ll be happy with the interest rate you are locking into when you select investment opportunities.
Whilst we offer a secondary market service for investment on-sell, we cannot guarantee sale success. If new investment opportunities offer high interest rates than the investment you want to on-sell it may be unsuccessful. In this case you will retain the investment, at what may be a lower interest rate than other investment opportunities, until the loan is repaid.
There is a risk Southern Cross Partners mismanages the business, and as a result, causes the business to fail. In the unlikely event this occurs, there will be no adverse effect on your investment, as the mortgage security and any funds associated with it, are kept separate from Southern Cross Partners’ business activities, in a Trust Company.
Southern Cross Partners has a formal agreement with another experienced finance provider, who will take over the management of the business, to continue to collect and pay your interest, and (when the loan repays), collect and repay your investment principal. Remember, your investment is separately and specifically supported by a mortgage registered over a borrower’s property, not over any asset owned or controlled by Southern Cross Partners.
All lenders are obliged to follow specific legislation when dealing with borrowers, both in the assessment phase, and in ongoing relationship management. Getting this wrong, in extreme cases, could put lending validity at risk. As you are investing in this lending, errors at this level could place your investment at risk (for example, if we do not comply with the requirements of the Credit Contracts and Consumer Finance Act 2003 for a “regulated” loan which may affect the enforceability of the loan agreement with the borrower).
To mitigate this, we have extensive policies governing all stages of the lending process, which we’ve formulated in conjunction with our solicitors. In addition, we have been lending since 1997, so have a vast pool of experience to call on.
To ensure we do follow our policies, we employ a full time Compliance Officer who continuously checks this, reporting directly to the Managing Partners and the board. Additionally, the board independently checks policies are being followed and we have independent auditors who also undertake sample compliance checks.
In addition to lending compliance, we also follow required investor procedures. There are several regular compliance reports required to be filed with our regulators. Failure to comply with these reporting standards or regimes could ultimately put our business at risk, but this risk is covered under the Management section above.
There is a risk the borrower’s security property is damaged to some extent. Southern Cross Partners ensures insurance cover in place when loans are made. However, there are circumstances in which an insurer may decline a claim in respect to mortgaged property damage. These circumstances include:
If the borrower owes more than the damaged property is worth, then there is a risk the loan will not be repaid in full, and investors will suffer a loss.
Some insurers will allow Southern Cross Partners an opportunity to pay the insurance premium, where the borrower has failed to do so. When we pay the insurance premium, it is added to the loan and will be refunded to us first where the loan is repaid, including where the mortgaged property is sold at a mortgagee sale.