Shifting market conditions could spur a wave of land sell-offs by Chinese owners who have overpaid dearly for prize plots in downtown Melbourne.
Michael Hanschen of Point Polaris says Chinese investors have been paying excessive sums for plots of land in coveted parts of downtown Melbourne due to in market inexperience for quite some time now.
“Over the past two to three years, real estate agents have been flogging large parcels of city sites for astronomical prices to new entrants to the market who don’t understand it completely,” said Hanschen.
“Large-scale companies or companies considered institutional in China might send some guys down here to acquire a piece of land, and the agents put together very competitive auction processes that leave investors with very little time to actually do much due diligence, if any. As a result they’re hit with outrageous land prices.
“We had a guy in here recently that bought a $16 million piece of land in the southern suburbs after just being here for three days. I think he’s popped down one or twice to Australia before, but essentially this is his first time in the country, and that’s common.”
Hanschen points out that many of these sites for which new owners have paid exorbitant sums are now subject to interim development restrictions introduced by the Victorian planning minister, as well as other market conditions, which are severely undermining their value.
“Many investors have ended up with a piece of land subject to new interim restrictions by the Planning Minister as to what they can build on it, so some people’s land might have been halved by these new regulations,” said Hanschen. “A lot of those sites that were bought, especially if they had local bank finance, are eating a hole in the pockets of investors through high interest rates or just interest in general, with little to no income from the site themselves.
“They’re going to have trouble justifying holding that piece of land for the period of time required to get a planning permit that would make that development profitable.”
The now dubious nature of these holdings is likely to trigger a wave of sell-offs over the next year or so in some of Melbourne’s key urban precincts.
“I think a lot of stuff that’s been sold in the last 12 to 18 months will come back on to the market in the next 12 to 18 months at potentially comparable prices,” Hanschen said.
The recent spate of residential development in Melbourne and its potential impact on the apartment market could also serve as a further spur to land sales by Chinese investors who overpaid for their plots.
“I would stress that it’s all highly reliant on what happens in the apartment market,” said Hanschen. “Analysts are predicting that the apartment market will stall in the middle of this year in terms of price and saleability in and around the CBD of Melbourne. I think there’s nearly a 1,000-apartment development going on in Melbourne right now, and a lot of stock coming online over the next 18 months.
“If that happens then the sites that were bought at such premiums will likely be sold at a loss, or stay at a flat rate for the purchaser who recently bought them.”
While Hanschen does not foresee much relent in the inflow of institutional and retail investors from China in future, he does expect tightening of local financing conditions to heavily curb the ambitions of overseas developers.
“The banks have tightened up significantly – the big four, essentially are not lending to developers, due to high exposure in certain areas in some instances, and in other instances just aren’t funding any greenfield sites at all. That’s most banks right now,” he said.
“Moving the stock is a problem in itself, because you have overseas sales limits, and the retail banks recently have said they want local postcodes, Victorian postcodes – not Sydney buyers trying to grab a couple of apartments on the cheap down in Victoria, but actually residents of the area.
“New to market and new to bank developers in Australia are especially affected – these guys have little to no ability to obtain a loan domestically at the moment.”