Finance Concerns from Buyer to Developer to China

Finance Concerns from Buyer to Developer to China

April 2018
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Finance Concerns from Buyer to Developer to China

If you’re a developer, finance from both a development and end-buyer perspective can be one of the most unpredictable aspects of your project.

Currently, many big lenders are instigating changes to valuations, deposit sizes and other terms and conditions which impact apartment and home buyers. This comes in response to increased pressure from regulatory bodies urging banks to improve prudential controls. 

In assessing a borrower’s capability to repay the loan, lenders are developing various strategies to tighten and toughen. Westpac, for example, as part of their ‘responsible lending’ regime, are asking applicants to reveal spending on everything from food to football.

While there are other means for procuring finance, these stricter conditions stem from several issues seen across the property market.


Banks experience increase in lending risks

Ratings agency, Fitch Ratings, has warned that property lending risks for Australia and New Zealand are expected to keep rising amidst international concern.

“Fitch expects any pressure from rising global interest rates to slowly impact the Australian banks funding costs,” Fitch Ratings Director, Bert Jansen, told The Australian Financial Review.

“It is not just the size of any rate increases, but also the pace at which these appear which will determine how households would be able to deal with the change in rates. Fitch's base case is for the Reserve Bank of Australia to raise rates once this year and twice next year.”

43% of Australian bank assets in December 2017 were made up of residential property loans, an increase from 39% five years earlier.

Fitch has noted that Asia Pacific regulators, including those in Australia, have tightened the macro-prudential measures in attempt to reduce potential property risks.

If certain factors are not addressed and controlled, vulnerabilities will grow that could be tested in a market downturn. Despite this risk, Fitch have indicated that “a residential property market downturn… is unlikely in 2018, given that economic conditions are likely to remain benign.”


Chinese developers heading for defaults as interest rates rise

As interest rates rise in China, some Chinese developers are finding it difficult to secure alternate funding to roll over record borrowings, according to Neuberger Berman.

"Smaller developers don't have sound cash flows and can't tolerate any halt in refinancing because of their high leverage," said Peter Ru, chief investment officer of China fixed income at Neuberger Berman Investment Management (Shanghai) Ltd., a unit of the New York-based firm, "weaker developers may face even higher borrowing costs."

Ru suggests that real estate companies have a debt-to-asset ratio higher than 70% will face high default risks this year as many don’t have the refinancing sources available to others. A governmental crackdown on shadow banking, a major cash lifeline, is a major blow for many of these firms.

While there haven’t yet been any defaults on publicly issued bonds from developers in China's local market, the concern is real and could have implications for the Australian market.


Australian developers face re-financing issues

The downsizer/owner-occupier market shows no sign of receding, but sales have been slightly slowed with investors. This, along with tighter controls on financing, have some developers feeling uneasy.

Last month, developer Gamuda’s South Yarra development in Melbourne was only 70% sold at completion and not yet profitable. More recently, Cranecorp’s Collingwood project has seen slower than expected sales with only 10 of the 17 units sold.

Cranecorp attempted to refinance the project at the end of 2017, but was unsuccessful. Developer Icon, Cranecorps’ joint venture partner, had originally loaned money to the project but recently has called for repayment, putting the site up in a mortgagee sale scheduled for March 7.

A Kerry Stokes-backed developer has since joined Cranecorp to refinance the Collingwood residential project.

Cranecorp Director, John Crane, has said that while construction costs were rising, it was access to finance that proved the biggest hurdle.


Property sector still enjoys high hopes

Despite some negative outlooks for residential and retail property market sectors in NSW, the latest ANZ/Property Council of Australia report indicates that Australia’s property industry, as a whole, is experiencing its highest confidence levels in six years.

Confidence in the retirement living and hotel sectors has proved very high, with better expectations for construction activity in most sectors as well. Concerns experienced in various sectors have yet to evolve into a cause for alarm.

Price expectations have showed to be stabilising, with the exception of NSW. Sydney's house prices are behind the exception, which fell 2.1 per cent in the year to March – the   sharpest annual fall in prices since the market started to cool late last year.

"It's not all smooth sailing," Daniel Gradwell, ANZ's senior economist, has exclaimed.

"The retail sector has been under pressure for some time, and respondents are increasingly pessimistic about the outlook for the next 12 months.

"Expectations of price growth and construction activity are falling, and any improvement feels some time away." 


Knowledge is the key, but always with a grain of salt

It is promising to see high hopes in a somewhat tumultuous period. Staying aware of finance issues in the news rooms will assist developers in readying themselves for possible pitfalls of the future. The concerns discussed and felt in various sectors of the industry are still preliminary; they have not transgressed into alarm.

This article is not a definitive assessment as to the overall state of the market, but should serve as a guide to highlight how respective sectors of the property market are dealing with change.

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