Uncertainty Abounds for Residential Developers and Financiers

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Tuesday, June 21st, 2016
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Looking back even just a year, a lot has changed in the world of finance and property development.

A suite of factors has been impacting on the lending environment for property developers, including:

Settlement risk for developments

We have seen a tightening of lending standards for home loan and investment property loans, along with area and off the plan restrictions or higher deposit requirements. These factors have increased the settlement risk for developers as buyers of the finished development have had – and continue to have – trouble financing an off the plan property that they purchased many months ago.

Non-resident borrowers

There have been additional hurdles put in place for non-residents chasing and financing properties in Australia. Foreign buyers typically are typically only able to purchase new properties and make up a significant portion of sales.

New Foreign Investment Review Board requirements, including application fees

This is coupled with higher state government stamp duty taxes in Victoria and a dwindling lending environment for non-residents (many lenders have recently pulled out of the non-resident lending market, with those who remain requiring a larger deposit), and will dampen demand in this sector of the market. In addition, there are restrictions on transferring funds from China that restrict Chinese borrowers (one of the largest and growing segments of foreign property investors to Australia) ability to raise a deposit.

Federal election and potential changes to negative gearing

You would have to be living under a rock to not know there is an election soon. You probably already know Labor has announced that they plan to reform negative gearing and limit any new negative gearing to new properties. You may think this could boost demand for new properties and favour developers, but the impact this policy may have on the wider market and thus the demand for new properties is a bit of an unknown in the mind of many, including development financiers.

With all these risks, it’s no wonder the major banks have continued to tighten their requirements on development loans. Second tier lenders are also thinking twice about funding developments in some areas that have a lot of developments; profitability is on the slim side if developers lack experience.

Demand for private funding for property development is naturally growing under such an environment where private funders take the risk or an increased rate of return.

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