Looks like things in the high-rise industry are tougher than we thought.
One of the odd things in economics and finance, is how long a market can be glaringly out of whack before the general public cottons on.
I’m thinking now about the emerging glut in high-rise apartment towers, and their dependence on foreign buyers.
I’ve been warning my readers about this market segment for almost two years now. Finally, it’s becoming common knowledge. Every week, we hear another warning about the coming shake-out. First it was in the financial papers. In recent weeks it’s gone main-stream.
It seemed that I was one of the first to pick up on it, but I didn’t have any special insider access or anything. I just had a curiosity, some publicly available data and a street-gambler’s instincts for a bad deal.
What’s surprising then is that while this unshaven high-school drop out picked up on it, no one in the industry seemed to, and rather than the collective wisdom of the market spontaneously changing course and rectifying the imbalances, things actually got worse.
We actually saw more and more approvals enter the pipeline, and a greater dependence on Chinese and foreign buyers.
And this is how crises happen.
And if you want to get a sense this week of how bad things are getting, take a look at the panic taking hold of the big developers.
The AFR is reporting that last Thursday, about 60 of the city's most powerful residential developers gathered together in the swanky Westin Hotel on Collins Street in the Melbourne CBD
“Those who attended the meeting covered every sector and segment of the development community from big listed players like Lendlease and Mirvac to the major private developers including Central Equity, ISPT, Metro Property Development, Gurner, BPM, Salta, Salvo and Little Projects.
A big block of attendees were Asian developers led by Malaysian giants SP Setia (which recently paid a record $101 million for the Telstra development site in the CBD) and UEM Sunrise, state-owned Chinese developer Poly Real Estate and CEL Australia, the local arm of Singapore-listed Chip Eng Seng.
The main items on the agenda: The sudden pullback by the major banks from lending to foreign buyers and new taxes imposed on foreign buyers in Victoria from July 1, including a 7 per cent stamp duty surcharge.
Developers fear this could lead to a surge in settlement defaults and send apartment values plummeting.
Danni Addison, CEO of the Urban Development Institute of Australia, told the Australian Financial Review there was great concern about the impact of numerous policy decisions on the property development industry and the economy.
“The industry has come together as one voice to tell the government about the real economic impact their decisions are having on the ground,” Ms Addison said. She said the UDIA and the Property Council will seek meeting with the state government to voice these concerns.”
Australia has a proud tradition of shameless rent-seeking, and it’s heartening to hear our big developers are giving our Asian friends a lesson in Aussie values.
But it’s hard to feel sorry for a mob wrestling with a demon that they themselves created.
And it’s a simple story of over-supply.
Next year alone, 20,000 apartments will be completed across Melbourne. In 2004, when everyone was freaking out about the glut in Docklands, Melbourne added just 6,000.
So it’s this glut that’s hammering prices. It’s hard to know exactly, but there’s reports that resale prices have already fallen 25% – though developers are working hard to keep this fact covered up.
And that’s the rub of the problem. It’s not the fact that banks are blacklisting China, or the government has added an extra 7% to foreign buyer stamp duty.
It wouldn’t matter if the Chinese buy was drying up IF these developers had produced a reasonable amount of stock that was attractive to all buyer segments.
But this is exactly what they didn’t do.
They put all their eggs in one basket. They focused on the Chinese market – with all these one-bedroom dog boxes, and were banking on Chinese investors soaking up the glut.
Charter Keck Cramer’s director of researchers, Robert Papaleo, has claimed that nearly half of Melbourne’s off-the-plan apartments are being purchased by foreign investors.
But now the Chinese flows are being crimped (mainly by tighter capital controls in China), they need help to move an excess bunch of stock that no one in Australia wants.
And with each foreign buyer that fails or refuses to settle, the developer looks to lose about $100,000 (according to estimates by buyers agent, Paul Osborne) – even after they’ve kept the initial deposit.
En masse, that creates a systemic problem. The industry is in trouble. No wonder the banks have thrown the gears into reverse and are trying to cover their arses as quick as they can.
And no wonder the industry has started counting seats on the life-boats.
But it’s hard for me to feel sorry for them.
And it’s harder still for me to be convinced that I, or any Australian tax payer, should have to front the cash to bail them out of their hole.
But here’s another prediction for you. As this ship goes down in flames, they’ll have their hands out right to the very end.
It’s the Australian way.
Watch this space.
Should we be helping them out? How big is the crater going to be?