Residential development sites remain riskiest investments with one in four “distressed”: LMW monitor

More than a quarter (28%) of distressed commercial properties listings over the June quarter were residential development sites, according to the latest LandMark White Forced Sales Monitor.

The next highest proportion were industrial properties (19%) followed by leisure (13%) – hotels, resorts and other accommodation providers.

The monitor tracks the proportion of commercial properties listed for sale by mortgagees, receivers or liquidators on the Eastern seaboard.

The report notes that majority of listed receivers’ stocks was found in regional rather than metropolitan areas, with the regional share at 64% in the June quarter. Over the year to date, the split was 75% regional to 25% metropolitan areas

The high proportion of forced sales of residential development sites - many in regional areas - comes at the same time as a rising numbers of small debenture investors are caught out by non-bank lenders that have on-lent their funds as mortgages over risky residential development projects.

The most recent to run into trouble was Victorian-based Gippsland Secured investments (GSI), where $154 million of funds have been frozen.

Other non-bank collapses – LM Investment Management, Provident Capital, Banksia and Wickham Securities – all provided funding to residential development projects, often as lender of last resort charging very high interest rates.

Overall the proportion of properties listed as distressed sales was unchanged at 23% over the June quarter - below expectations of a pick-up in distressed listings - with Queensland accounting for more than half of these (57%) followed by NSW (26%) and Victoria (7%).

Ross Horsley, research manager at LandMark White notes that it was the fifth time in seven quarters that more than half of all distressed listings were in Queensland.

The New South Wales share of distressed listings increased from 9% in the March quarter to 26% in the June quarter taking its annual share to 19%.

The Victorian share of receiver sales listings dropped to 7% in the June quarter, from 15% in the March quarter.

“The garden state recorded its lowest number in the series so far, with only seven commercial properties being advertised on behalf of receivers,” says Horsley.

He points out while an expected rise in distressed listing did not eventuate and is a positive sign for the commercial property market, “the fact that there was a relatively small number of properties advertised at all meant that the distressed share of the market remained close to one in four, at 23%”.

“With this drop in both distressed and ‘normal’ volumes, the latest results are open to interpretation.

“A positive view is that the lower number of distressed listings means that the mortgagees and receivers have worked through their stock and there should be fewer forced sales going forward. And, the reason there were fewer total listings is because owners are under less pressure thanks to the low interest rates, so they can wait for an improved market to sell. With less available stock and a lower proportion of distressed stock, the market will finally have a chance to strengthen.

“However, the opposite view is that the drop in total listings is a sign that the commercial property market is stalling from a very slow pace, and, the reason the distressed numbers are also falling is not because of a lack of stock, but because receivers and mortgagees are releasing only as much as they feel the market can absorb.

“On the evidence of the Forced Sales Monitor, that saturation level appears to be around 25%, and with this constant level of distressed stock and only those owners under pressure to sell doing so, the market will soften further,” he says.