The Day the Presales Died

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This time last year GPS stopped lending while we reviewed the apartment oversupply issue.

The view we formed was that:

  • Availability of construction finance would act as a brake on the delivery of new apartments in Brisbane;
  • Due to the then current supply levels, we would see little upward price movement for new apartment sales;
  • As the median Brisbane apartment price was substantially lower than that of Sydney and Melbourne, with higher yields, there would be little downward price movement; and
  • The above factors would limit presales, as buyers no longer needed to lock in prices so as to avoid an increasing market.

During the course of 2016 we saw:

  • The banks substantially reduce their lending volumes for construction loans. If they are lending, they now require 100% plus debt coverage from presales;
  • Long established lenders, such as GPS, did not increase their lending volumes to fill the void left by the banks;
  • The banks largely excluded presales to non-Australian residents from their presale requirements;
  • The banks substantially reduced lending to non-Australian residents;
  • The Chinese government increased its controls on capital leaving China;
  • The Australian government increased fees, charges and taxes on non-Australian resident apartment purchasers; and
  • Achieving presales in Brisbane died around November 2016.

Stock levels have allowed purchasers to focus on completed apartments. The levels of already rented apartments, with overriding rental guarantees, has substantially increased. The question asked is “why tie yourself to a project which may not get financed, may have construction delays and may not be rentable, when you can start earning a return from the settlement date?”

My personal view is that the value of presales from a credit perspective has substantially decreased during the course of 2016. Presales achieved in the current market appear to have a higher settlement risk, than contracts entered into pre-November 2016.

You would have to be pretty gullible and full of oxygen to enter into a presale contract in the current market. There is adequate completed stock available and little prospect of capital growth in Brisbane apartments in the next twelve months.

GPS has always been an “old school” lender.

It is all about:

  • Location, amenities and quality of end product;
  • The expertise of the development team; and
  • The financial strength of the borrower.

GPS will not lend in the inner Brisbane urbanisation areas. I continue to be concerned about this area due to the level of supply. I continue to believe that prices in that area are around 20% over the mark in order to cover the cost of marketing and unionised construction.

Australian resident purchasers, like my Self-Managed Super Fund, will boycott the area. We believe that prices are too high, yields are too low, and quite a bit of the product is cheaply built, which will increase maintenance costs over time. There will not be any capital growth in the foreseeable future due to the level of competition.

GPS will be sticking to lending in our traditional areas, in and around Brisbane, which are existing residential areas with good amenities and sound resale prices. We lend because we want to lend, not because we have to lend.

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