Chinese Owned Development Firms – Caveat Emptor

Property

In a recent ABC Australia analysis (ABC.net.au 5 Oct 2017), Tim Murray (J Capital) has commented that “Chinese developers that have been overpaying for properties in Australia are now struggling to find the finance to close those deals and they’re actually walking away from large deals and large deposits,”

Mr Murray is alluding to the development and construction firms themselves, not Asian investors.

We have now seen marketing boards and shiny site hoardings taken down as Chinese developers, run out of options, halt sales and pull out.

Recently several of our investors have raised concerns with the quality, value and settlement risks associated with opportunities currently within the Sydney, Melbourne and Brisbane markets.  These developments are being sold locally and overseas and being developed by Chinese based firms using Chinese based construction entities.

We know that Chinese authorities have become concerned for Chinas financial stability, which has been threatened by capital outflows. Chinese regulators have made efforts to stem the flow of (¥RMB) Yuan out of China by tightening restrictions on foreign investment by Chinese owned entities.

The Chinese Government is encouraging investment in resources, agriculture and technology and discouraging investment in residential, hotels, sport and film by placing them on a restricted list.

Developments not yet commenced. Chinese developers procured 38% of sites in in 2016, outbidding local developers, clearly relying on a growing real estate market and exchange rate benefits.

We know from experience that many Chinese owned developments are being 50% sold to Chinese investors with 50% available for local buyers.  This 50/50 ratio traditionally had FIRB approval and subsequently triggered development funding.  We are now hearing however that Australian banks are now unlikely to fund the development unless 100% of sales are to local buyers.  This move is in response to Asian investors unable to settle on completed property, defaulting and leaving the bank and the developer in difficult situations. Chinese developers unable to get Chinese funding and already in ‘presale territory’ to overseas investors will need to un-wind all existing contracts to re-sell to local buyers or risk finding themselves unfunded.  The expectation is that many sites acquired by Chinese developers will now come back to market with or with DA approvals.

With so much uncertainty around Chinese owned property, linked to Chinese owned development firms, with building contracts let to Chinese construction companies, my advice for local Australian investors is to tread carefully when choosing an acceptable investment property.

Developments at or nearing completion. A development which has pre-sales to Chinese investors presents enormous settlement risk at completion as Chinese investors can’t get funding to complete their purchase from either Chinese or Australian institutions. Their only option is to walk away, placing enormous pressure on the developer to stay solvent.

Stories of large scale defaults from Chinese investors in the Brisbane and Melbourne markets are now emerging leaving developers with large swathes of now ‘unsold’ property in possibly oversupplied areas.  As the developer is at peak debt, a sell-off of these ‘defaulted’ properties results in falling property valuations affecting the local investors within the development.

An added concern is the evidence that a large proportion of this stock has an apparent lack of overall quality, size and amenity.  Aimed at an uneducated overseas market, local investors drawn in by cheap pricing, may find themselves lamenting their decision as evidence always reveals that quality over price provides rewards come sale time. Development ‘sell offs’ will result in a false lowering of the suburb median price point, which in-turn will have a flow on affect in the bank valuations of even the better developments within the region.

Our advice?  Caveat Emptor.  Not all property is equal. The connection between price and quality is not new, in-fact several scholars have penned quotes to remind buyers of the impact of low price, low quality purchases.

Sir Henry Rice said, ‘Quality is remembered, long after price is forgotten’ and my favourite is from Aldo Gucci, Aldo said, ‘the bitterness of poor quality is remembered long after the sweetness of low price has faded’. This was never truer than it is in Real Estate.

An investors EXIT strategy needs to remain at the front of any decision, because it is not until you want to sell the asset that you realise the error of a low priced, low quality property. Don’t let your next purchase end in tears, call our property team today to discuss your nest steps on 1300 925 081

Oct, 30, 2017

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