October 5, 2016 by Dymphna 3 Comments

Who is lending to these things?


Tell me it isn’t you. But are you sure..?

Are you exposed to the high-rise bubble?

Ok, ‘bubble’ is pretty strong language. But it sure is a funny looking market.

We’ve got a huge amount of supply coming on line over the next 18 months. It’s not clear that the stock that is coming online is particularly well suited to the local market, and seems to be aimed at foreign investors.

So we’ve got a glut of supply coming to meet dubious and fickle demand, and alarm bells are ringing.

I’ve been giving mine a good ‘ol whack for a while now for the benefit of my readers, but these days, it’s pretty much common knowledge.

The major papers are running stories on it. Every analyst in the country is talking about it. I even saw it on the telly.

The term ‘crazy’ is getting bandied about like nobody’s business.

And yet these things still keep going up. The developers still get funding, and more high rises get built. Supply just keeps on coming.

So it makes me wonder, who’s funding these things. Back when the APRA restrictions came in I was struggling to get backing for solid town-house development, and the numbers were great. So who’s funding high-rise developers to bring more supply to an over-supplied market?

We know it’s not the local banks. Pretty much every lender in the country has gone cold on inner-city high-rises.

Turns out the answer is foreign banks, and self-managed superfunds.

Both of these make me nervous.

First up, on the foreign banks, check out this chart from UBS:


The blue line shows that the majors froze lending to ‘residential commercial” (mostly high-rises) at the beginning of the year, and if anything its tapering off.

But then look at the brown line. Just as the majors froze, foreign banks stepped in and ramped up their lending.

As UBS say:

“The rapid growth in high rise apartment stock has led to concerns over a potential oversupply and questions as to who is funding these projects. Data released by APRA indicates the Major Banks have significantly reduced this lending… This is consistent with comments from the Majors that they have significantly tightened underwriting to high-rise apartments. However, these projects still appear to be going ahead with the funding increasingly being provided by Foreign Banks, which grew their exposures by 27% in the June quarter and 67% over the last six months.

Growth in total exposures (drawn & undrawn) to Australian commercial property remains strong at 10.8%, the highest level since the Financial Crisis.”

(my emphasis).

So foreign banks are helping drive lending growth to the highest level since the GFC, even though every Tom, Dick and Harry with his feet on the ground won’t touch inner-city high rises with a barge pole? Is that really what’s going on?

I need to get a bigger alarm bell.

But it’s not just foreign banks. It’s SMSFs as well, who are being lured into funds that have large high-rise exposures.

From the Australian Financial Review:

Self-managed superannuation fund investors who are now being lured into funds that offer high returns by lending to property developers the bank have rejected, risk major financial losses, according to experts.

Bank lending for property development is tightening and for many developers the gap in funding is being filled by a shadow banking sector which raises money from investors with the promise of returns of 12 per cent or more.

Credit Suisse equity strategist Hasan Tevfik, has estimated that the $622 billion SMSF sector was now a significant lender to property through senior debt, mezzanine debt and preferred equity.

For some property veterans, that is a reminder of the money that surged into property lending, and was then lost, through funds such as City Pacific and Australian Capital Reserve in the last boom, and through Estate Mortgage in the boom before that.

“It’s the same old, same old, and it’s about to happen again,” says Michael Holm, a 35-year veteran of property lending and the executive chairman of Australia’s oldest and largest commercial mortgage originator, Balmain Corporation. “It will crash and burn and people will lose billions.”

Steady-on. I don’t know that it’s that bad.

But this does make me nervous. Developers have to pay more for funding because the big banks won’t lend to them. So that’s why funds can offer 12%. But you’ve got to ask yourself, do I want to be backing a horse the banks won’t touch?

12% is awesome until it’s not. Then it’s nothing but heart-ache.

So if you run a SMSF, and I know a lot of my readers do, I’d be checking what kind of exposure you’ve got to the high-rise sector. Sometimes it can be in funds within funds.

Property is a fantastic component of any portfolio, but I just don’t know about this high-rise sector business.

It all smells a bit fishy to me…

Have you been making money out of high-rise?