The Ministry of Housing and Urban Development (HUD) have recently released the Residential Development Underwrite (RDU) initiative to help spur some development activity in New Zealand given the current softness in the market. We sat in on the webinar and have read the webpage and PDF’s so you don’t have to and sought to surmise the detail below.
The RDU is effectively an improved version of the KiwiBuild scheme designed to support the development of properties into urban areas in New Zealand. The primary objective of the scheme is to ‘maximise the overall housing supply, while minimizing the risk and cost to the crown’. This statement is important to take note of, it was raised multiple times in the webinar and is the guiding principle for the scheme.
How does it work?
The Residential Development Underwrite is designed to work as a tool to substitute for open market pre-sales in a development that may be required to secure finance for a property development.
An underwrite is a tool whereby a counterparty contracts to acquire a number of properties within a development in the event they cannot be sold to the market. In the private market there would be a fee charged for this consideration as well as the discount set on the acquisition price. The government will not charge a fee, however, does apply a discount rate to the purchase.
Securing a RDU will allow the developer to meet a pre-sale threshold set by a lender for a project (as the government agrees to purchase those units if they cannot be sold otherwise) and therefore enable the finance for the project to proceed.
What are the criteria
There is 5 key criteria to meet for a project to be considered for the RDU;
- The developer must be an established residential developer with a history of delivering projects of a similar size and typology.
- The developer must own the land (or the option to do so) and hold all the necessary resource consents to affect the development.
- The developer must be able to provide evidence that the underwrites are required.
- The developer must be willing and able to provide a recent valuation of the completed stock.
- The development must contain a minimum of 30 homes. If the development is staged these must be across a single stage.
These requirements should be straightforward to meet. It was made clear in the webinar that the above are really non-negotiable and so it is imperative that if applying you have your ducks in a row and are able to deliver on each item.
HUD will not consider projects of less than 30 units, nor projects that require consent amendments.
How is it different from KiwiBuild?
The RDU has removed some of the hurdles set by KiwiBuild that limited its effectiveness. These are the removal of any price caps and buyer restrictions. Previously KiwiBuild limited the sale price of certain properties which in effect either deterred developers or set an additional arbitrary discount rate on the properties. This limited its appeal to developers thus limiting how many homes were built under this scheme.
There were also restrictions to purchasers of KiwiBuild properties where incomes had to be below certain caps, they needed to be first home buyers they had to own and live in a property for a minimum of 3 years. This limited the buyer pool for the properties under the scheme which limited some developers to actually move product on.
The changes are designed to increase the appeal to developers and buyer pool thus achieving the goal of delivering more properties at the lowest cost and risk to the crown.
KiwiBuild also required a minimum amount of 20 homes to be underwritten, this scheme whilst requiring 30 homes in a development do not have a minimum threshold for the number of units to be underwritten and would rather it be fewer than more.
Where are the underwrites available?
Anywhere in New Zealand. The framework has written into it that the target locations are the key urban centers (Auckland, Hamilton, Tauranga, Wellington and Christchurch), however, subject to an assessment HUD will happily consider other areas.
How do I apply and how do HUD assess an application?
You can apply online here. It is estimated that it will take up to 4 hours to put an application together and through. This may vary depending on how well prepared you are, however, do make sure you allow some time!
The assessment process is expected to take approx. 12 – 14 weeks, however, the developer will be notified of the applications process as it makes its way through. Again, some patience is required here!
HUD have provided a breakdown of their assessment criteria and the respective weight they place on these below.
- Risk and net cost to the Crown (35%)
- Project Readiness (25%)
- Volume and nature of supply (20%)
- Location (20%)
Risk and net cost to the Crown (35%).
This comes back to our earlier comment where the primary objective is to ‘maximise the overall housing supply while minimising the risk to the crown’. HUD want to be sure that the project will be successful and their underwrite, whilst required for finance won’t be required to be actioned.
To assess this HUD ask to see and assess several things including;
- A development feasibility.
- The developers experience and previous projects.
- Developers equity contribution.
- The proposed discount rate relative to the market value.
- How many houses are required to be underwritten.
The interesting items to consider here are the equity contribution and how many homes need to be underwritten. Historically KiwiBuild was a tool that was not only used to secure finance but also to encourage greater leverage with some projects obtaining finance upwards of 90% of the total cost of the project on the back of an underwrite and the guaranteed take out in the event the underwrite was required. The focus on developer equity would suggest using this as a tool for additional leverage might not be as well received.
Alongside this, the desire to underwrite fewer units in the development goes back to managing the Crown's risk by encouraging the bar to be set as low as required to secure the finance as opposed to ‘over-insuring’ the developers' risk.
Having obtained some open market sales alongside the underwrite will go a long way to satisfying this due diligence reducing the number of units you need underwritten, informing the market value and appeal of the properties (more below) and reducing the perceived risk of the development.
Project Readiness (25%)
The focus here is around how near the project is to commencing. To satisfy this HUD ask for and assess the following detail.
- The development programme and commencement date.
- Availability of development finance.
- The developers team and their ability to complete the project and meet deadlines.
- The access to and quality of contractors for the project.
Again, easy enough to understand and meet. Providing a finance offer, detailed programme and a draft contract or tender document(s) with your submission should satisfy most of the above. Further, a QS report would cover a lot of those items and add confidence to the developers capability.
Volume and nature of supply (20%)
Going back to the primary objective of ‘maximising the housing supply’ the key here is really the bigger the project the better. HUD also wants to look into the typology and ensure there is a demand (and need) for the product being built.
Here they are simply looking at the number of units and typology / design thereof.
Location (20%)
Location can be viewed at a macro and micro level. HUD want to ensure that the local area has a need (more dire than other locations) for housing and the development is meeting that demand. To assess this they will review the current undersupply in the region, population growth and future developments in that region.
At a micro level, projects with better proximity to amenities will be favoured.
How is the underwrite triggered and what happens?
The underwrite is an option, not an obligation. It will only be triggered if the developer, or lender if assigned to them, chooses to action it. This would normally only be in a scenario where the properties have not been sold down to the open market or a refinance / restructure of any remaining units isn’t possible. The point is that the option sits with the developer (or lender if assigned to them as part of the finance).
Once triggered and the conditions are met then HUD will acquire the nominated properties at the strike price (the discounted value). They will then proceed to sell these properties down either to the open market, iwi, CHP’s or possibly be used as social housing. This is up to HUD to determine and should be a consideration for the developer. It is uncertain whether projects with a RDU will carry any perceived stigma with a risk that some housing may become social housing deterring open market purchases. In practice, however, I would anticipate this won’t be too much of an issue for good product.
What else should I know?
On the webinar it was made clear, and it is mentioned on the RDU webpage that HUD will not consider an underwrite for 100% of the units in a development. HUD even went so far as to suggest the fewer units required to be underwritten the better.
It was also made clear that whilst there are no price caps on properties, HUD will be focusing on more affordable products. It was queried whether an underwriter would be available for a $2 million dollar property and that was unequivocally turned down.
Both the above circle back to the primary objective of maximizing the housing supply at ‘the lowest risk and cost to the crown’. This should remain front of mind when considering a project.
Lastly, there are no restrictions around typology. HUD are happy to look at stand alone homes, terraces, apartments or duplexes. Whatever you are planning to build can be considered so far as it meets their objective and criteria.
We think that this is a vast improvement on the KiwiBuild program and would expect to see some use of the scheme to help get projects out of the ground. If you have a large project and are considering the RDU and how it might help with finance, reach out today!
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