David Landa Stewart - Lawyers since 1927 Feature Graphic
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"Penny pinchers"

Florence Chong, The Australian, 8 April 2004

LIKE a wrecking ball to the back of the head, no-one saw it coming. Already facing a glut of new apartments, developers in Australia's biggest unit market were scrambling to find new ways to sell their stock to wary investors.

They had hardly given any thought to the Carr Government's mini-budget, hurriedly unveiled to exploit a political spat with Canberra over the division of GST tax revenue. Then, at 11am on Tuesday, NSW Treasurer Michael Egan introduced the mini-budget saying he was overhauling property taxes to "take some heat out of the frenzied residential investment property market".

Under the new tax, selling an investment property will attract stamp duty of 2.25 per cent, while the land tax scale has also changed.

If Sydney's biggest apartment developer Harry Triguboff sold off his (privately held) 1,000 apartment portfolio he would be up for $12 million in the new stamp duty charges.

Yesterday, Mr Triguboff and other developers were not commenting, but behind the scenes lobbying of the Government must be intense. Big or small, developers are facing sharply increasing risks from the impact of the new tax on investors, and as increasingly nervous financiers tighten lending criteria.

"Already, there are hardly any off-the-plan sales. Building costs have gone up 20 per cent in the last six months," said Paul Kelly, director of Realty Marketing in Sydney.

"Our sales to investors have dropped by 80 per cent.

"Some projects are going to fall over as a result of what the state Government has done."

The average investor holds a unit for five years, he said, and the NSW tax changes would translate into a "1 to 2" per cent interest rate rise.

Justin Brown, Colliers' International residential managing director, said vendors (including developers) might be forced to absorb the 2.25 per cent.

Sydney project marketer Earl Cramer said the market would cope with the changes, just as it did with GST.

The development sector has entered a difficult phase with banks tightening the screw on project finance for residential projects.

Some smaller developers have started to seek out higher cost alternate finance.

Originators and funding packagers say developers unable to meet the leading banks' pre-sales targets now borrow from private funders who charge 11-12 per cent for the loans.

In extreme cases, capital-starved developers are believed to pay up to 25 per cent in interest rates.

Michael Holm, managing director of property loan originators Balmain NB, estimates that such deals probably totalling between $700 million and $800 million are underway for projects mostly in Sydney and Brisbane.

Developers, who declined to be named yesterday, said major lenders have started to call for top-up equity mid-stream when a project fails to meet agreed pre-sales targets.

"The market is contracting," said a Melbourne-based developer. "The banks are not helping with their actions.

"I hear that National Australia Bank has (temporarily) withdrawn from the market, and the ANZ is setting unrealistic hurdles making it impossible for developers to meet," said a Sydney-based chief executive of a development company.

"But Westpac is still lending, and to a lesser extent, the Commonwealth Bank. The second tier banks - St George, Suncorp Metway - are lending," he added.

A spokeswoman from the ANZ said: "Unfortunately the bank was not interested in talking to the media on the topic.

A Westpac spokeswoman said: "We assess each deal individually.

"We constantly review our lending guidelines, but we have not found it necessary to change them for several years now."

Peter Baldi, head of NAB's corporate banking, said the bank had not changed its lending policy and continued to lend to well structured, soundly capitalised property businesses.

"We are monitoring the industry closely as we believe that there is some evidence that the market is nearing or is at its peak in the current cycle. We will continue to lend cautiously with this in mind," said Mr Baldi.

A leading fund packager said: "The tightening is not confined to residential. It has flowed on to commercial and light industrial."

Industry sources said the tightened lending criteria included:

• Apartment pre-sales requirements of up to 80 per cent.

• An increased proportion of equity required by developers.

• Not lending for developments in locations seen as having a glut of apartments. (Suburbs seen as problematic are inner city Melbourne and Sydney, Melbourne's Docklands, Alexandria and Zetland in Sydney's south and the Gold Coast.)

• While deposit bonds are still accepted, lenders prefer cash or bank guarantees.

Banks scrutinising the progress of projects and becoming less accommodating with missed targets. Melbourne developer MAB began construction of Condor, the fifth tower in its New Quay, a waterfront precinct in Melbourne's Docklands, last September.

MAB's managing director, Andrew Buxton, said: "We pre-sold 70 per cent of our apartments before we went to our financiers. We are continuing to sell units every month."

Mr Buxton said MAB discharged its loans fully in December after buyers of 200 plus units in the Nolan Tower settled their purchases.

"Our banks are meticulous. We provide quantity surveyors figures as the project progresses," said Mr Buxton.

Until recently, the industry said some banks lent up to 120 per cent of the project costs, including funding for the entire construction and money for post-completion marketing.

In today's market, some smaller developers are finding it difficult to achieve presales of 50 or 60 per cent.

Developers have turned to private capital providers, like Provident Capital, Shakespeare Haney and Willis & Bowring for funding.

Depending on the projects, these financiers are prepared to fund up to 80 per cent of the total project cost and sometimes without pre-sales.

"We are starting to see deals that previously came to us now go to private funders. These are mostly for projects of up to $15 million," said a finance company executive.

Industry sources said private funders traded off the risk against earning a higher interest rate, sometimes 11-12 per cent compared with 7-7.5 per cent for bank finance.

A small developer said: "The imperative is to get a project off the ground.

"The cost of holding a vacant site for 12 months can turn a viable project into an unviable one."

Michael O'Sullivan, managing director of Provident Capital, said: "There has been a dramatic improvement in the quantity and quality of construction loans from the third quarter of last year."

Recently, it provided $14.5 million for a project on the Gold Coast, with 100 per cent pre-sales. "Normally, such a project would be funded by a bank," said Mr O'Sullivan.

James Fielding Capital, director Garry Rothwell, said: "We see an upturn for our mezzanine (debt) products across the board from residential to industrial and commercial projects."

Balmain's Michael Holm said: "The (residential) slowdown is not across the board. It is tied to location. Developments in established suburbs and near the water remain popular with buyers.

As to whether apartment projects were likely to be left incomplete, as was the case in the early 1990s downturn, the industry said it was unlikely. "Where I can see the possibility of that happening," said Grant Munro, head of Macquarie Bank's property finance business, "is when the source of mezzanine dries up."

Mezzanine providers have started to feel the pain. Recently the listed Biron withdrew from the mezzanine lending after taking some losses in the Sydney market last year.

Between the banks and Treasurer Egan, who would want to be developing apartments today?


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