ANZ warns against developers issuing 'unacceptable' securities to property buyers

ANZ Banking Group has issued a warning about shares being issued by developers to property investors that side-step planning laws and can’t be used as security for loans.

Calling these securities “unacceptable" the bank has issued a confidential memo to its banking and mortgage broker networks warning about the deals that are being detected around Sydney's inner suburbs, the Australian Financial Review reported.

The bank says the security structure, which is being used to sell multimillion share offer documents, could trap unwary buyers in hot property markets.

Buyers of the securities will not have title to a single property, will be unable to use them for a loan with most lenders and could have difficulty finding a buyer, the AFR said citing banking specialists.

The deals were likely detected when investors tried to use the shares as security for loans.

Copies of the contracts, which price individual shares at more than $1.6 million, appear to have been documented by lawyers and accountants. They have been issued and signed this year.

Lenders fear the security would place them behind other creditors in the event of a foreclosure, which makes the risk “unacceptable”.

"It has come to our attention that customers are offering unsuitable company share title securities for home loan applications," the ANZ memo told its broker network states.

An ANZ spokesman confirmed the arrangements but said it had so far only identified a handful of contracts around Waverley and Randwick, the AFR reported.

The issue stems from the fact that local councils will not issue strata titles for developing multiple residences on a property.

"Some councils, particularly in NSW, are not allowing newly established properties to be subdivided, so the customers/vendors are sometimes setting up a private company and issuing shares,” the memo continued.

"These tend to be duplex type arrangements, where a certain number of shares will equal one unit and a certain number equals the other unit."

A duplex property is effectively two conjoined properties occupying one block or plot of land and sharing at least one common wall. Both dwellings in a duplex are built at the same time.

If strata titled, each dwelling may be sold and owned separately. But if not strata-titled both dwellings within the duplex can only be sold together.

Under the arrangement, the ownership of the land stays in the name of the vendor. The vendor then sets up a company that issues shares for sale.

It effectively means the purchaser does not have exclusive use of the proposed unit. For example, a purchaser of a 25 per cent share in four apartments would own 25 per cent of all units, not a specific unit.

"These types of security properties are not deemed "company title and are unacceptable," the bank states.

"Any customers entering these arrangements should be informed that ANZ does not support this type of lending."

A spokesman for National Australia Bank was cited by the AFR as saying that it also does not accept company share titles or stratum titles as acceptable residential security for home loans.

Other lenders declined to comment on whether property investors are using similar sales methods, but mortgage brokers say they would be surprised if other lenders had not been approached.