ONUS ON BANKS FOR CONSTRUCTION RECOVERY

Written on the 6 May 2010

ONUS ON BANKS FOR CONSTRUCTION RECOVERY

WHILE popular Australian economic indicators are pointing towards recovery, the same cannot be said for the construction sector, particularly in Queensland.

With abundant resources we are the envy of the balance of the country and many regions globally, but the state is hamstrung, lagging behind Australia’s two largest states.

Construction finance approved as a proportion of GSP, which puts states on an even pegging regardless of their size, has dramatically reduced over the past two years as the GFC took hold.

This is most pronounced in Queensland with a 57 per cent decrease in construction finance approved between 2007 and 2009. New South Wales was marginally better at 52 per cent, while Victoria’s construction and development sector appears to have weathered the financial storm better, with a 22 per cent decrease.

People may argue that Queensland’s dramatic decrease is simply due to it coming off a very high base, but even back in 2007 when the state was booming, construction finance as a proportion of GSP was still below that of New South Wales and Victoria.

But unlike other states, we have had to deal with the departure of one of our largest developer financiers – Suncorp.

In 2007 Suncorp was believed to comprise a 25 per cent to 35 per cent share of the state’s funding market, so it’s departure from development lending has easily contracted the sector by a third. It’s a void yet to be filled and this is something the State Government needs to address as a matter of urgency.

The departure of Suncorp is not the only concern, as it is coupled with the increased restrictions the major banks are placing on development and construction lending. The criteria which the banks require developers to meet prior to finance approval has become increasingly strict and thus highly restrictive.

Property developers traditionally aimed for presales in the vicinity of 50 per cent, but the banks now require developers to achieve pre-sales of around 75 per cent prior to them making any finance available.

Before, prudent developers were able to hold their premium stock back from the market until after the project’s completion, when higher prices are typically achieved.

At the 50 per cent pre-sale requirement, developers could maximise capital growth over the construction life of the project, but the new 75 per cent mandate means developers are now forced to put all available stock on the market to allow the pre-sale criteria to be achieved as quickly as possible.

A decrease in the loan-to-value (LVR) ratio offered by banks is also decreasing supply of finance within the market, which means the amount a bank will lend relative to value has dropped. Banks used to offer developers an LVR upward of 70 per cent, now a developer will struggle to receive an LVR from the banks greater than 55 per cent.

This means that the developer has to access capital elsewhere and given we have just come out of a major economic downturn, the market is not flush with capital looking for a home.

A drop in demand is also contributing to the large decrease in finance approvals. It’s been impacted by several factors, like extended planning timelines, excessive infrastructure charges and the recent influx in antidevelopment legislation. On the other hand, strong housing price growth has also rendered the market unaffordable for a large proportion of would-be participants, exacerbated by an apparent undersupply of dwellings.

Economic law would suggest that as prices increase supply should follow suit as developers capitalise on inflated prices, but in Queensland this is not the case. The legislative beaver has dammed the economic stream.

The market is currently restrained from its natural movements by excessive regulatory pressure, so it cannot meet the equilibrium where supply meets demand — a far more sustainable location. While this shortfall in finance approvals continues, not only will Queensland home-buyers continue to feel the pinch, but so too will property developers.


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