Last Wednesday we held the first event in our relaunched Restructuring and Insolvency Forum.

A few days before the forum the Reserve Bank of Australia warned that the massive number of new apartment blocks approaching completion could send developers broke and leave the banks nursing big losses. The day after the forum, The Australian reported the findings of Morgan Stanley research which forecast a credit crunch and a hard landing for the new apartment construction cycle with a surplus of 100,000 apartments by 2018. The investment bank predicts a 'sudden stop' of apartment activity, triggered by regulator-driven rationing of credit, which will cause the construction industry to shed some 200,000 jobs.

Senior partners from our Finance and Real Estate groups joined Executive Director of independent financial advisory business, Allegiant FS, Sean Birchley on a panel to discuss whether it really is all doom and gloom for property developers, as predicted by some.

The sentiment among the panellists was less bearish which, to some extent, could be attributed to their developer clients’ fortunes being linked to positive consumer sentiment. That said, they don’t forsee the hard landing predicted by Morgan Stanley and, while they acknowledge growing issues with settling apartment sale contracts on time, they believe developers are taking active steps to deal with this. Here is a summary of their comments.

The property market in Australia – it’s really not such a bad news story

Large scale apartment projects are only one segment of the residential property market. Other sectors such as residential subdivision and smaller scale apartment developments are all selling well and sales are settling. But the successful projects and the good news stories tend not to be reported in the media.

Queensland – the fundamentals 

Traditionally the demand for residential property in a particular state was driven by immigration and interstate migration. Slowed population growth in Queensland in recent years would ordinarily raise questions about who is going to buy all the apartments being built. But something different is happening in Queensland at the moment. In the past year, more than 58% of high density dwellings such as apartments were purchased by foreign investors. Thus, demand for apartments is no longer dependent on population growth. People need not be concerned about an over supply; but acknowledge that the supply and demand chain is taking on a different form.

The tourism effect

The impact of tourism on growth in certain pockets of the property market cannot be underestimated. Just last year more than 250,000 Chinese tourists visited the Gold Coast. This has stimulated the economy and driven demand for better infrastructure, which has created jobs and (as people relocate to follow the job market) a greater demand for housing.

What about Brisbane?

Looking at development approvals in Brisbane and surrounding areas shows that there is something like 15,000 – 20,000 units approved for construction in the next five years. The question of course is whether those approvals will proceed and whether the projects will eventuate.

According to the panel, and the statistics presented at the forum, there’s an undersupply of apartments in the Brisbane market with developers not able to acquire sites quickly enough. Additionally, even if local banks are less willing to fund the developments, most developments are being driven by foreign entities with sufficient funding to enable the projects to proceed.

Mitigating settlement risk 

There’s also a question around whether purchasers will be able to secure the finance necessary to complete purchases, which puts settlement at risk. At present many purchasers of current projects are struggling to obtain finance from Australian banks due to a tightening in lending criteria, which generally requires purchasers to save larger deposits.

Developers are taking a number of steps in order to mitigate this risk however. Some of these include:

  • extending settlement dates up to six or nine months;
  • allowing contracts to be rescinded and new contracts entered into with related parties to the purchasers who have the ability to settle; and
  • combining the rescission of a contract with an arrangement where the deposit from the first contract is set aside and a second deposit taken on the new contract, with both deposits going towards the eventual purchase price when the new contract settles.

Despite these steps, one can’t help wondering whether the extensions of the settlement date are only kicking the can down the road and delaying the inevitable?