Bank bastardry and high costs stall unit market

By Terry Ryder, 21st July 2009

High prices and finance difficulties are impeding the new apartment market nationwide, according to Matusik Property Insights. The biggest single issue, it seems, is the attitude of the banks – so often the cause of problems in the finance and property worlds.

Experienced property analyst Michael Matusik says multi-unit approvals fell 44% in May and, while monthly approvals data is volatile, medium-density dwelling starts are on “a serious slide south” despite lower interest rates, economic stimulus measures and rising investor interest.

“In previous building upturns multi-unit approvals have often led the charge – so why not this time?” Matusik says.

Matusik says high prices, restrictions on buyer finance and difficulties with developer finance are the key limiting factors on this market.

He says a typical new apartment in a downtown city area costs the buyer at least $8,000 per square metre – which means a tight 60m² two-bedroom apartment with one parking space would cost $550,000.

“Secondly, investors buy close to 75% of all new apartments sold,” he says. “Regardless of what the banks are saying, they are not lending easily for investment. They’re seeking higher equities – a 20% deposit is often the minimum and in some cases they’re looking for 25% to 30%.

“In addition, residential rents have stopped growing and the average gross investment return for a two-bedroom apartment across our capital cities was just 1.6% last year, with capital values falling 2.5%.

“Call me a pessimist, but I can’t see investors rushing back into the new apartment market. They are likely to amber along this cycle rather than sprint.”

Matusik says most new units sold recently have been “substantially discounted” – often below replacement cost. “Some are not that ‘new’ at all – one such project in the Brisbane CBD, claiming 113 sales since February, has been on the market since mid-2004,” he says.

The third big issue behind the fall in production of new units is difficulties with developer finance. Second and third tier financiers are out of the market, dramatically reducing the amount of development finance available.

“Just 12 months ago, banks would lend of an LVR of 80%. Today they are asking 60-70% and want 110% in re-sales, based on the dollar value of the amount borrowed. Deposit bonds or bank guarantees are no longer good enough. Deposits must be in cash. Developers are often asked to provide a profile on each buyer.

“Even cashed-up quality developers cannot make most of their new projects work under these conditions – and god help you if you need to roll over funds.”

Matusik says there are no quick fixes and construction of new apartments is going to be “sluggish at best” for the foreseeable future and “dead in the water” unless the banks free up development finance.

ENDS