Lending standards will save us from property crash, says funder

The head of a real estate investment firm is confident that the Australian property market has unique dynamics that will help avoid a crash but admits that a correction has already started.

In a market update to investors, Qualitas group managing director Andrew Schwartz, said the boutique lender is already seeing a slowdown in terms of new housing starts.

However, he believes that the Australian market — unlike its foreign counterparts — has certain qualities that allow it to self-correct and adjust through a potential period of oversupply.

The Qualitas boss pointed to national vacancy rates in residential property, which he says are sitting at a stable rate of around 3 per cent.

“However, we do see some warnings on the horizon for the short term. This includes increased supply coming into specific precincts across Australia, rising site values, rising construction costs, lower levels of available construction finance and curbs on loans to foreign purchasers,” he explained.

“Australia is no different to any other first tier global city in Asia, Europe and the US, in that there are substantial levels of new residential construction activity. A key difference, however, is the financing environment for these developments.”

Mr Schwartz explained that the Australian construction finance market is predicated on the need to secure presales at a level that’s at least equal to 100 per cent of the construction loan raised by a developer, before development can commence.

“This presale coverage ratio has been required by Australian banks for decades and has created a very prudent standard of lending. It reduces the risks of oversupply, thanks to the non-speculative nature of the sales commitment upfront. Moreover, the buyers need to be diversified, as the banks limit any one buyer from purchasing multiple apartments.”

Foreign buyer risks overstated

Qualitas says another key distinction of the local market is the mix of foreign and local buyers.

According to Mr Schwartz, while there has been plenty of concern expressed about the volume of sales to foreign buyers, the Australian banks — using prudent lending standards — have insisted that a maximum of 30 per cent (and often much lower) of total sales could be made to foreign purchasers.

“In addition, we know from our own experience that approximately one-third of all foreign buyers settle using their own cash resources. So, even assuming all the remaining foreign purchasers fail to settle — which seems a very harsh assumption — the banks will still have very comfortable levels of security,” he said.

Forced apartment sales not on the agenda

Given the high level of pre-sales required upfront, the dominance of local buyers, and the banks’ conservative lending standards, Qualitas is confident that there is unlikely to be a rush of bank liquidation sales for apartments.

“There could be a short period where there is some market excess, but overall, we continue to see the absorption rates being strong, as evidenced by continuing sales across well-designed projects,” Mr Schwartz said.

“The demographics also continue to weigh in favour of residential apartments – including an ageing population seeking to downsize, an influx of offshore students, and continued high levels of immigration.”

Short-term oversupply; long-term shortage

Qualitas says many of its own debt financing opportunities are for projects conceived in 2014-15.

“These ‘Vintage 2014 and 2015’ projects have undergone a long gestation period — from land acquisition, architectural design, planning development approval, securing pre-sales and, finally, obtaining finance. The Australian banks are continuing to finance well-structured transactions such as these ones, albeit at lower loan-to-value ratios than a year ago,” Mr Schwartz said.

However, Qualitas notes, the number of new projects being conceived now – the 2016 Vintage – has substantially reduced.

“The drop in new projects is due to a number of reasons, but mostly because site values have well and truly peaked, making development feasibilities harder to achieve. Coupled with higher construction costs and longer project timeframes, it’s hard to make the numbers stack up in the current environment.

“Given that we don’t expect a drop in construction costs any time soon, development feasibilities will remain challenged until there is confidence that apartment values will rise, and support the higher cost structures being encountered,” Mr Schwartz said.

Qualitas predicts that any excess apartment supply, if it exists, will be short-lived due to this lack of new projects.

“By 2020, prices will have risen, especially in Sydney and Melbourne, to support a new round of much-needed development projects”.

[Related: Apartment glut 'theme park scary']

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