Off the plan dangers sees Firstmac avoid highest risk Melbourne and Brisbane projects

Non-bank lender Firstmac has indicated its reluctance to be involved in the funding of “vertically integrated” development schemes.

“What we are targeting is vertically integrated groups that have the same builder, lender, solicitor and marketing outset," Firstmac chief financial officer James Austin told Australian Broker.

“I call them vertically integrated groups because they are one consortium who are developing the property and who own and are selling the property.

"They are using the same solicitors and then are marketing the properties offshore.

"So it is this concentration which is quite a high risk form of lending. 

"Therefore [Firstmac] have decided to pull out of that business.”

Austin noted it just happens that it is commonly overseas Chinese investors who are attracted to these sorts of schemes.

“As we saw some of these types of loans coming into our pipeline, we sent a note out to our brokers saying that we would not do this type of business.

"It just so happened that the particular example we had at the time involved Chinese investors.

"But it is not the nationality or the borrower we are targeting – it is often the offshore resident which is susceptible to this marketing scheme and form –it is that type of vertically integrated type of operation.”

According to Austin, these types of loans are higher risk due to concentration and conflict of interest, particularly in off-the-plan developments.

“First of all you are getting concentrations in one area.

"You’ve got borrowers from overseas who are going to be less familiar with the true values of these properties. 

"In addition, when you’ve got this sort of integration going on, you’ve also got a conflict of interest where all the parties are working to one outcome – which is to build and sell properties.

“I think the market is quite volatile right now given all the changes and development going on and I just think that off-the-plan is potentially a very problematic area. 

“With funding being restricted across the industry, to investment particularly, I think that off-the-plan could become a very dangerous area.

"I think that there is a lot of development going on – both in Melbourne and in Brisbane – and I think that when they come to deliver it may be not a good place to be,” Austin told Australian Broker.