Eighty percent is a number that catches people’s attention. Especially when you’re talking about potential default rate.
That was the claim made last week by Li Ming, co-director of real estate company Aussiehome, in an interview with The Australian on Chinese settlements on off-the-plan properties. “The off-the-plan apartments market is now the worst I have seen in the last 10 years.”
Ming’s comments reflect the growing challenges faced by Chinese buyers wanting to invest in Australian OTP properties, both in terms of obtaining residential property mortgages and getting cash out of China.
The troubles started in 2015 when, in response to the concerns of Australian bank regulators, starting most Australian banks stopped giving mortgages to offshore buyers. This credit drought has only gotten worse as the number of overseas buyers with OTP properties to settle has grown.
Adding to these woes, the Chinese government has moved to restrict capital outflows from China, effectively preventing Chinese investors from either paying cash or using loans sourced in China to pay for their Australian real estate purchases. Things came to a head on New Years Eve, when the Chinese government sent a letter to all domestic banks suggesting they needed to more carefully check the documentation of overseas transfers. Despite the letter's innocuous wording, the effect was immediate: overnight, Chinese banks throttled outbound money transfers from a torrent to a trickle.
Chinese investors have been left crambling. And Aussie developers have noticed.
“The Chinese thing is stressing people out,” CT Johnson of China consultancy Cross Border Management told The Urban Developer. “It’s slowing down Chinese presales, which used to be a gimme for lots of developers. On the other end of the process, even though default rates haven’t gone up, developers are definitely nervous about settlement, wondering where their Chinese buyers will get funds.”
Is it really that bad? Are Chinese investors finally abandoning the Australian real estate market?“No way,” said Matthew Royal of Development Financing Partners. “The Chinese love Aussie property, and money will always find its way to good projects. But people ARE paying more attention to financing, both on the development side and in terms of the final buyer.”
Andrew Gannon, CEO of Homeloan Corp, agrees. “We know Chinese buyers are having trouble getting money out of China, so finding lending solutions in Australia is more critical than ever. But there’s continuing strong demand which shows no signs of abating, and there are solutions available for most Chinese investors.”
Australian developers are adapting in a number of ways, including paying more attention to domestic presales, forming relationships with lenders offering mortgages to overseas buyers, and tapping into extra capital when necessary. A number of developers have begun taking loans collateralised by completed units and then offering buyers extended settlement times for a fee. This “vendor financing” approach appears to be gaining traction with both developers and buyers.
So is it storm clouds or blue skies for Aussie developers selling to Chinese buyers?“This is hiccup,” Johnson concluded. “This always happens when there are changes in the market. Things are tense at first and then people find new solutions. That’s whats happening here. The market adjusts. When it comes to Australian property, the Chinese are here to stay.”
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