Developers face substantial losses due to foreign borrower changes

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Apartment developers in Melbourne risk being left hundreds of thousands of dollars out of pocket per apartment if foreign buyers are prevented from settling their purchases.

As Australian lenders continue to tighten their lending standards for foreign buyers of residential property a report from Melbourne based buyer’s agency Secret Agent suggests developers face losing up $100,000 dollars on each apartment settlement that is prevented by the lending crackdown.

Working on a hypothetical sale of a two-bedroom 68 square metre apartment in Melbourne for $714,000 (worth $10,500/sqm), Secret Agent director Paul Osborne believes a developer would lose $100,046 if a foreign buyer could not settle.

According to Osborne, the buyer would have paid a 10% deposit of $71,400 which the developer would keep when the settlement fails, however the apartment would then be competing in Melbourne’s secondary market which only attracts at $8,463/sqm, making the unit’s market value just $575,500.

By recouping the deposit, the developer would now only be out $67,100, however after paying commissions and fees for the apartment’s resale, the loss would again move into six-figure territory.

Others have previously said the lending restrictions, especially those faced by Chinese buyers are something that people need to “keep an eye on” and Osborne said a number of developers are becoming increasingly concerned about the situation.

“Conversations between Secret Agent and various developers over the past month have revealed their increasing anxiety about potential settlement issues. These developers, who have settlements due in the next 18 months, are worried that many of their apartments may not be able to settle due to the restrictions placed on foreign buyers by local banks. This is likely to have substantial implications,” Osborne said.

“With most of the local major banks out of the market, there is hope for developers that Australian domiciled Chinese Banks will take on the lending to buyers. However, the current loan ratios are unlikely to be favourable and the valuations of the apartments might push foreign buyers to drop their deposits and not settle their contracts at all,” he said.

The apartments built marketed to and built for overseas buyers are also likely to be smaller preferred by Australian buyers, which could also further hurt their resale prospects.

Osborne also said recent stamp duty and land tax charges levied against foreign buyers in Victoria are also posing real risks for the city’s apartment market.

“The overseas buyer that can still purchase it under limited circumstances would now have to pay stamp duty plus a further foreign purchasers levy of 7% which is set to come into the market in July 2016. This means that $87,890 would need to be paid in additional fees by a foreign buyer purchasing the unit at settlement,” he said.

“This is unlikely. The developer has a right to claim a shortfall in price to the defaulting purchaser, however this might be extremely hard to do when committed contracts have originated from countries such as China.”
 

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