Melbourne unit settlement crisis could impact Sydney: Gottliebsen
A new property speculative game is emerging in the Melbourne apartment market with some 15,000 units due for settlement around June 30, according to Robert Gottliebsen.
These developments might also have long-term implications for Sydney.
Speculators are buying up multiple blocks of land in outer suburban Melbourne which threatens to be nearly "as deadly as the old apartment game" which led to the 15,000 problem settlements, writes Robert Gottliebsen in The Australian. This also has national implications because because inexperienced banks are in danger of being caught, he adds.
“At the Australian Leadership Retreat on the Gold Coast over the weekend I learned that of the 15,000 vulnerable apartments, in the vicinity of two thirds — mainly the big developments — are owned by major Asian institutions or funded by big Chinese banks,” he said.
Both these groups are taking a long view so developers are not under pressure and will receive their cash.
But the problem could be triggered by the nearly 5,000 apartments of the 15,000, especially because Australian banks have lowered the amount they will lend to locals wanting to settle and the Chinese can’t get funding from either the local banks or extract money from China.
"We are looking at a $1 billion plus problem. Some of the money has been raised by the non-banking finance channel. But there will still be a substantial shortfall which will hit developers and their bankers," he said.
"One of the danger points in the apartment crisis is that many local and Chinese investors when buying off the plan, say, three years ago bought several units because all that was required on each unit was a 10 percent deposit.
"The idea was that when settlement was due they would sell the surplus apartments at a profit, so reducing the cost of the remaining apartment. But the apartments have not risen in price so all the off-the-plan purchased apartments require full funding, which can’t be arranged from banks."
While the Melbourne apartment market is struggling with a settlement crisis, albeit reduced, Gottliebsen said that outer suburban land developers have rarely seen such strong demand.
He noted some of it was coming from those leaving Sydney to take advantage of the fact that blocks of land can be bought for around $250,000.
"Significant portions of the Indian community seem to be switching cities because they can enter the outer Melbourne market at a much lower price than Sydney," he said.
"These are genuine buyers who are changing cities. But there is another and even more significant sector of the market that is playing the same game as unit purchasers did three years ago — they are paying a deposit (usually 10 percent) on multiple blocks of land. And sometimes they duplicate the strategy as the developer moves from one stage to the next.
"Under the rules of outer suburban development, a developer gets funding from the bank to constructs roads, sewerage etc once they have sold, say, 60 per cent of the development. But unwary developers are discovering that much of their recent 60 per cent quota of applicants comes from related parties — and sometimes the same cluster of buyers are present at various stages.
"Everything will work well if the land rises in price but if, as happened with apartments, the land does not rise sufficiently in the short time frame then the buyers will not be able to settle on their multiple purchases.
“The developers I know are now vetting all those offering to pay deposits and sign up. And that detailed examination of prospective purchasers caused them to detect the Sydney exodus.
“It’s not big enough to worry the harbour city in the short term but in the US we are seeing many young people leave cities that have become too expensive."