Property industry warns settlements failure

The number of apartments due for settlement is ballooning – and concern is rising about whether buyers will be able to pay for them, but big developers say the rise in value is mitigating that risk, writes Michael Bleby.

Sluggish salaries to slow Sydney, but not Melbourne real estate.

The number of apartments due for settlement is ballooning and, despite the soothing words from Lendlease and Mirvac at the half-year results, concern is rising about whether buyers will be able to pay for them.

An estimated 44,784 apartments are due for completion and settlement this calendar year across Sydney, Melbourne and Brisbane, up almost a quarter on last year’s 36,486, according to figures from planning consultancy MacroPlan Dimasi.

Next year they will jump again to 52,920, the figures – based on previous apartment approvals – suggest.

But the surge in settlements – this year alone will see four times as many apartments settle as the 11,145 of 2010 – at a time when banks are tightening credit, brings the prospect that buyers who paid a 10 per cent deposit two years ago and were counting on a 90 per cent loan to meet the remainder now due will have to stump up more. If they can’t, they may have to sell them into a weakening market.

Stretched too far? The coming surge of settlements may catch out buyers and developers as banks rein in lending. Photo by Eddie Jim

For many buyers in Sydney, which overtook Melbourne in numbers of settlements in 2014 and is now surging, the risk is minimal, says David Milton, CBRE’s Sydney-based managing director of residential projects. The price rises of recent years make it likely that even if banks are cutting back, the increased value of their dwellings will put buyers on safe ground, he says.

“Sydney’s probably, at this point in time, got very low settlement risk,” Milton says. “There’s been such enormous growth in prices for people who bought off plans in the past two to three years, that what’s settling now is between 15 per cent and 30 per cent higher in value than what they’re paying”.

Likely completions of apartments, based on prior approval numbers

In Melbourne’s South Yarra, developer Michael Yates says only three of the 86 apartments in his Yarra House development sold over the past 18 months failed to settle – an “average” level.

“I don’t think there’s too much gloom about people settling,” Yates says. “[Interest] rates are the lowest they’ve been for donkey’s years.”

Prodded into action by regulator APRA last year to tighten lending to investors, however, banks are applying a range of measures, such as postcode-based restrictions, reducing their own valuations of dwellings about to settle and lowering the loan-to-value ratio (LVR) at which they will lend. The surge in supply at this time will catch some buyers out, CBRE’s Milton says.

“The settlement risk will occur in places where the prices are slowing and the market’s getting harder,” he says. “We’re seeing some developers using third parties or investment planners that sell property as an investment product. You’ve got all these groups that aren’t real estate agents selling property that they can’t sell in the market. It’s all the off-market transactions.”

These properties are typically lower-quality ones, such as on main roads or away from public transport, sold by investment advisers at inflated prices for commissions as high as 5 per cent, Milton says.

“Clients should be buying from reputable groups like us and not from other spivs in the market.”

Credit tightening across the board

Not all housing product is equal and some projects raise more red flags than others, but credit tightening is happening across the board, even in Melbourne’s leafy suburbs.

Rick Curtis is the managing director of Bensons Property Group, a developer of premium apartments in the Victorian capital’s inner and fringe suburbs. Settlement on Solstice, Bensons’ 108-unit development in Hawthorn East, is due in May and Curtis is advising buyers of those homes – which range from $425,000 to $1.2 million – to be able to cover up to half of the price of their units.

“We tell people – just count on getting 50 per cent gearing and count on having your money ready,” Curtis says. “The rules have changed. If they are thinking they are going to get 70 per cent real gearing without mortgage insurance and without collateral security, it’s not going to happen.”

Banks are not only cutting back their LVRs from the previous 95-odd per cent towards 80 per cent, they are also taking a more conservative approach to valuing completed apartments, and in the case of at least one retail bank, this means between 15 per cent and 23 per cent below the purchase price, Curtis says.

“The main issues we’re hearing from developers is there are those that have left themselves short in terms of settlements because they’re finding the banks here are lending less – a lot less – so instead of ​expecting to be able to gear to 75 per cent to 80 per cent, the reality is the bank will only let them gear to 50 per cent, because the valuations are down,” Curtis says.

At this stage, no one is predicting widespread failure, however. It will be development by development.

“Look for the areas where prices have gone up the least, that’s where you’re potentially getting into problems,” says Jason Anderson, MacroPlan’s chief economist. “People who came in latest to the party are the ones who are going to suffer that risk.”

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