Projects scuttled by lender lunacy

Posted on 21/08/2009  

Bank lending policies are stalling unit development around Australia. According to long-time property analyst Michael Matusik, even quality developers can’t make projects stack up under the criteria imposed by lenders.


“Medium density starts are going to be sluggish at best for the foreseeable future and dead in the water unless banks free up development finance,” says Matusik, who runs Brisbane-based Matusik Property Insights.


He says the GFC has removed second and third-tier financiers from the market, reducing the amount of development finance available.


“Twelve months ago banks would lend on an LVR of 80%. Today they are asking 60-70% and want 110% pre-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 also often asked to provide a profile on each buyer. Even cashed-up quality developers cannot make their new apartment projects work under these conditions.”


Of course they can’t. This is lender lunacy. On the one hand, a key reason the Australian economy has not collapsed is that our banks are conservative lenders by world standards, so we can be grateful for that. But, they’ve gone way overboard in their attitude to lending for development and investment. Economic activity and jobs creation is being scuttled by financier phobia.


What is curious is the lack of outcry from developers about this. They are vocal about approval delays and government taxes & charges as the key reasons for stalling development, but it’s clear the real reason is the lack of development finance on sensible terms.


Matusik says there are plenty of development sites for sale, but few buyers. “We suspect that apartment site values have fallen as much as 50% across Brisbane since the GFC,” he says.


Meanwhile, Matusik says the Brisbane apartment market has lapsed into the doldrums. He says: “We can’t see investors rushing back into the new apartment market. They are likely to amble through this cycle, rather than sprint.


“Rental growth has stalled, vacancy rates are up and re-sale performance has been lackluster at best. New apartment sales have also tanked and most new proposals have been mothballed.”


Matusik says there were around 500 new apartments for sale in the Brisbane inner-city market a year ago. Today there are 700 for sale, with another 330 new apartments on the market in major developments in the middle-ring suburbs.


“Investors buy close to 75% of all new apartments sold,” he says. “And, regardless of what the banks are saying, they are not lending easily for investment.”


Matusik says the average gross investment return for a two-bedroom apartment across the capital cities was just 1.6% last year, with capital values falling 2.5%.


“Recent re-sales across inner Brisbane didn’t make that much money – just 0.7% per year, or $6,250. By comparison, relatively new apartments were re-selling for annual gains of 10%, on average, during the first six months of 2008.


“Most new apartments sold in recent times have been substantially discounted, often below replacement cost – and are not that ‘new’ at all. One such project in the Brisbane CBD, claiming 113 quick sales, has been on the market since mid-2004 and the remaining 165 apartments were liquidated in late 2008.”


He says rental demand has dropped sharply. Only one of 10 inner-city agencies reported stronger demand in the June Quarter. Rents have stopped growing (except for one-bedroom units) and the Brisbane inner-city vacancy rate is now 3.3%.



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