Borrowing terms to remain harshest for residential developers until global situation improves: CBA head of credit

Residential property developers will continue to have to pay a premium and achieve high off-the-plan presales to access the funding required to build their projects, according to the Commonwealth Bank.

Commonwealth Bank chief credit officer Ross Griffiths says banks continue to look for pre-sales of 100% “or even more in some cases” before considering providing financing.

In its March 2012 property outlook report, BIS Shrapnel noted that majority of developers and purchasers chose to remain on the sidelines in the uncertain economic climate in the past financial year. 

“The uncertain economic environment continues to place financing constraints on developers, with high levels of pre-commitments still necessary to secure funding in many instances.

“Whilst this is less evident for the larger developers who are able to borrow on a corporate basis as opposed to a project-by-project basis or even finance their projects in-house, speculative development by smaller developers has been much harder hit,” says BIS Shrapnel.

The major banks have taken over as financiers of residential developments after the withdrawal of non-banks and foreign lenders due to the high cost and high risk of funding property developments.

In addition to the requirement that they sell out their developments, property developers are also being asked to provide multimillion-dollar deposits ranging from 20% to 30% of the project cost.

According to Griffiths, borrowing costs will remain high amid the volatile economic environment and tougher regulatory requirements under Basel II and even tighter requirements under future Basel III rules.

“Unless the global markets become awash with funds,” there would be no improvement to the funding problems afflicting much of the property sector,” Griffiths said at The Australian Financial Review Commercial Property Conference last week.

Griffiths says banks are holding cash of $110 billion, on which they are making “little or no margin”.

“So the cost of our funding, if we are not able to lend it out, is much higher. We have that extra liquidity sitting there earning nothing just to make sure we can continue to lend ourselves.”

Griffiths says banks are providing funding at 200 to 300 basis points above the cash rate.

At the same time as Griffith has warned that lending rates will remain high, ANZ boss Mike Smith has been in Hong Kong reassuring Asian investors about the overall health of the Australian housing market.

In his presentation Smith highlighted that Australian households remain well-placed to service their mortgages.

He also sketched out the differences between the Australian market and the US market such as the fact that all mortgage lending is full recourse with loan-to-valuation ratios averaging less than 50%.

Figures released by RP Data show for the December 2011 quarter show that 6.4% of Australian homes were valued at less than their purchase price up from 4.9% in negative equity in the previous September quarter.