The Commonwealth Bank has reduced the amount of finance it will lend to property developers in the latest move by one of Australia’s big banks to reduce their exposure to the property market.
Fairfax reports this morning that the bank has allowed late stage financing negotiations with multi-unit developers to fall over “because CBA has changed its lending terms and required a higher level of loan coverage.”
Part of the reason for the new approach is new capital requirements and lending restrictions on investors.
“Prospective developers have been told that the bank now requires the percentage of pre-sold apartments must now equate to 100 per cent or more of the debt provided by the bank. It used to be about 80 per cent. The loan-to-value ratios have also apparently changed. The bank will only lend 75 per cent of the total development cost, down from 80 per cent,” Fairfax said.
That’s also a warning to investors who are buying off the plan in the hope of a quick turn (profit from sale before settlement) or capital appreciation to built their deposit, because as well as capital and lending restrictions the change is also related to “settlement risk”.
Settlement risk for developers is the risk that a buyer, who has put down a deposit, will be either unwilling or unable to complete the purchase once the building is complete. That means the developer could end up as the holder of one or many units in their building they had considered “sold”.
Thus the bank wants developers to have a little more skin in the game and has reduced the amount it will lend them from 80% to 75%.
But the move also seems to underlie Ross Elliot’s piece in Business Insider earlier this week which mapped out what an Australian housing downturn could look like for investors.
Elliott hypothesised a perfect storm for the investor who just before settlement is hit with a lower valuation than expected, banks lending a lower amount on the purchase and as a result needs to find more cash to settle. But, it is also a storm banks and developers have seen before in other property cycles.
It’s also the very storm APRA’s new lending restrictions on investors and the banks raising rates and restricting credit to investors just might create.
This move might be aimed at developers but it is investors who should be worried.
You can read more here.