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 by us, but just how far reaching an impact this could have on New Zealand is really unknown. Negative impacts could be seen on any of: Housing Demand; House Prices; Employment Levels; Interest Rates; etc
While the short term nature of our lending/investments and the supporting registered mortgage over the borrower’s property may help to limit your exposure, the negative impacts described above could result in a shortfall in the loan repayment by the borrower (from a borrower default, negotiated lesser repayment amount of mortgagee sale) and you may not receive full repayment of your investment.
Risks
Economic Risk
Market Risk
The growth in house prices is a significant talking point in New Zealand since 2015 however recently the Auckland property market has flattened despite the positive economy and shortage in housing supply.
Housing shortfall per year peaked at 8,919 homes for the 12 months to June 2015, reduced to a shortfall of only 3,434 in the 12 months to June 2018
There appears to be a reduction of appetite for investment property with LVR restrictions and other deterrents such as increased insulation & quality requirements along with health & safety liabilities playing their part. RBNZ figures show a reduction in new mortgages advances for investment property from 35% in August 2014 to 17.5% in November 2018.
Barfoot & Thompson 2019 figures show that Auckland is still growing at a rate faster than what housing can be built. If this trend continues and migration continues to slow then is it possible that the supply of new homes in Auckland could start to outstrip population growth sometime in the next two years.
Interest.co.nz estimated that Auckland has estimated a housing shortage of 34,000 homes has developed.
Developers building these new houses also are facing challenges such as reduced demand from property investors (as per above) and offshore funders (due to changes in 2018), obtaining funding and the risk that end purchaser are unable to purchase as banks seem to be only providing turn-key approvals to first home buyers.
However if current levels of development continue, then the supply shortage issues may ease which could put downward pressure on the property prices, or more likely extended the time of this flattened market.
If this is the case then the flattened housing market could cause reduced appetite for developers to take on new projects, which would then increase the supply shortage, particularly while it is unclear who the end purchasers are.
Ultimately everybody has their own views on the market, but we must not forget to look to our own economy as well as keeping a wary eye on the Global Economy.
It is within your power to select investments that you feel comfortable with, and that fit your own requirements and financial planning and in making your investment decisions you should remember that a negative impact on the market could result in a shortfall in the loan repayment by the borrower (from a borrower default, negotiated lesser repayment amount or mortgagee sale) and you may not receive full repayment of your investment.
Borrower Risk
When it comes right down to it, your investment interest is being paid from the interest that a borrower is paying on their loan. When a loan is first provided, we undertake checks to ensure that 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 with that 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 that is owed, but also for all outstanding Interest and Costs), however if the borrower’s circumstances or the property value have changed to such a degree that we are not able to recover the full loan amount from the borrower or on a mortgagee sale, your investment may be impacted by the shortfall and you may not receive full repayment of your investment.
Valuation Risk
Placing a value on a property is not an exact science. It is simply just 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 that values change over time, and certainly over the past few years those changes have mostly been upward. 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 that values take this into consideration, and make investors aware of the issues.
This is another good reason that we look at multiple sources of values, as this 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 just where those values are coming from; who is doing them; and how old they are. If there are factors which negatively impact the valuation of a borrower’s property, this could result in us not being able to recover the full loan amount from the borrower if they are in default or on a mortgagee sale. Your investment may be impacted by any shortfall and you may not receive full repayment of your investment.
Interest Rate
Presently interest rates are stable, and by historical standards, low. But this will not always be the case, and you need to consider if you will be happy with the interest rate that you are locking into when you select the loan to invest in, if interest rates eventually start rising again.
Whilst we offer a Secondary Market service for you to on-sell an investment, this may not be achieved if the new offerings available to investors are at a higher interest rate than the investment that you are trying to sell. You may therefore find that you are obliged to remain with the investment, at what may be a lower interest rate than other investment opportunities, until the loan is repaid.
Management Risk
There is a risk that Southern Cross Partners mismanages the business, and as a result, causes the business to fail. In the unlikely event that this does occur, 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 Partner’s 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 borrowers property, not over any asset owned or controlled by Southern Cross Partners.
Compliance Risk
All lenders are obliged to follow specific legislation when dealing with borrowers, both in the assessment phase, and in the ongoing management of the relationship. Getting this wrong, in extreme cases, could put the validity of the lending at risk. As it is this lending that you are investing in, 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, with these policies 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 that we do follow our policies, we employ a full time Compliance Officer who continuously checks this, reporting directly to the CEO and the Board. Additionally, the Board undertake its own independent checks that policies are being followed. On top of all this, we have independent auditors, who also undertake sample compliance checks.
In addition to lending compliance, there are also procedures that must be followed when dealing with Investors. There are also quite a number of regular compliance reports that are 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.
Insurance Risk
There is a risk that the property which is mortgaged to support your investment, is damaged to a small or large extent. At the time that a loan is made to the borrower, Southern Cross Partners ensures that there is insurance cover in place. However there are circumstances in which an insurer may decline a claim in respect of damage to a mortgaged property. These circumstances include:
1. A failure by the borrower to make adequate disclosure at the time of applying for the insurance;
2. The insurance cover has lapsed because of a failure by the borrower to pay the premium; and
3. The damage is intentionally caused by the borrower.
If the borrower owes more than the damaged property is worth then there is a risk that the loan will not be repaid in full and you 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. Where we pay the insurance premium, then this will be 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.
