Finance and the fragile building sector

The Australian royal commission of inquiry into the banking sector is the gift that keeps on giving for media outlets across the ditch. This week: a new slew of evidence about superannuation fee rorts, the rapidly rising price of compensating customers diddled in the ‘‘fees for no service’’ scandal, and a plan to place official ‘‘spies’’, appointed by the regulator, into financial institutions.

In New Zealand, the Reserve Bank and the Financial Markets Authority have responded with a deep dive into local financial institutions’ consumer protection practice, and are due to report in October. That should be good news for retail bank customers.

But it misses a wider set of issues relating to levels of bank profitability, conservative lending practice and the economic impact if commercial borrowers are finding working capital unduly difficult to access from the trading banks.

For example, the regulators might consider whether the commercial fragility in New Zealand’s construction sector is exacerbated by risk-averse and inflexible bank lending policies.

The Government conceded this week that some of its agencies make terrible customers for largescale construction companies because they nickeland-dime on everything to produce both inferior buildings and cash-strapped builders.

Fletcher Construction’s agreement to a screwdown on the cost of SkyCity’s convention centre is perhaps the best example of this. A good deal for taxpayers but it nearly saw off one of our biggest construction companies at a time when the industry was overwhelmed with work.

Meanwhile, the jarring on-site impact of each new commercial construction firm failure, most recently Ebert Construction, only further disrupts the sector and encourages the next domino to fall.

Banks are not the only factor in this volatile mix, but it seems timely at least to ask whether banks need to consider whether their web of costly, rigidly applied lending obligations is helping to create rather than prevent a financially stressed construction sector.

Commercial banks have been stepping back from lending to large-scale apartment and housing developments for some time, partly reflecting developers’ liquidity risks fears, but also their Australian parent companies’ greater appetite for repatriating capital to home base.

That reluctance to lend inevitably feeds into projects that are still proceeding. Bonds, retention requirements, commercial lending rates at twice and more the interest rate charged on a home loan, all represent major sources of cost and risk to a construction sector contractor.

When seeking funds, many will also find it difficult to deal flexibly and commercially with their bank, which has its own preferred legal and other advisers, contract forms, and approaches to security for lending.

Except for the largest bank customers, contractors will often deal with loans officers with limited commercial experience, who are constantly changing and so have little knowledge of their business, and whose job is not to think creatively about their project.

Developers who can will tap other sources of capital and avoid dealing with banks – or for that matter, the Government – at all. The number of contractors still willing to play the game with a bank inevitably shrinks.

That is bad for the Government’s affordable housing aspirations as it reduces the scale of construction sector’s capacity at a time when the pipeline of projects is large and expanding, while showing near-term indigestion in the Ministry of Business, Innovation and Employment’s 2018

National Construction Pipeline Report.

If the banking sector was struggling with profitability, then perhaps there would be an argument for letting it protect its margins by declining to allocate massive pools of capital except to the very safest and highest-margin opportunities.

But bank margins in New Zealand are strong, the banks themselves are well capitalised, and they face almost no competition from second-tier lenders since the cleanout of the finance companies in the late 2000s. Is it time to ask whether what the construction sector really needs is a more competitive banking sector?

BusinessDesk

Developers who can will tap other sources of capital and avoid dealing with banks at all.