Banks ‘very concerned’ as developers struggle for pre-sales

Bank of Sydney executive general manager of commercial banking, Fawaz Sankari, says the lender has been receiving an “enormous amount” of inquiries about construction finance.

“There is a huge increase and reliance on foreign investment purchases on the pre-sales side. We have noticed that on the local front a lot of our long-term solid developers are really struggling to get pre-sales locally,” Mr Sankari told the Vow Financial Commercial Conference in the Gold Coast last week.

“There have been a couple of clients who we have had on 50 per cent pre-sales and they are yet to achieve those. Yes, we want to mitigate our risk, but we also want to help the client mitigate their own risk in terms of biting off more than they can chew.”

“I think a lot of the banks and lenders out there are very concerned about what is going to happen in the next 12 to 18 months.”

Several lenders, including Australia’s big four banks, have tightened their lending to non-residents in recent months. Queensland and New South Wales announced they will hit foreigners with surcharges on all residential property transactions.

Bank of Sydney has a preference for financing developments in the core markets of Sydney, Melbourne and Adelaide for deals up to $20 million, Mr Sankari said. Unlike some of its larger competitors, the bank has not changed its policy on pre-sales.

“I know a lot of the other lenders are working at 100 per cent pre-sales. We are sitting at 75 per cent.”

However, he added that the bank is “very selective” about who it lends to, with preference given to existing customers.

“When it comes to new-to-bank customers, we look at the developer’s experience, what their assets and liabilities are and fundamentally the size of the project and whether they have experience of that type of project. Also the area they are going into.”

Mr Sankari said Bank of Sydney has recently received a large number of inquiries from developers purchasing properties interstate for the first time.

“We see that as a risk. Also your builder who has done six to 12 units and then trying to get up to 80 to 120 all of a sudden. That is a bit of a concern in our climate.”

The risk appetite for developer finance is diminishing among Australian lenders as cooling property prices, tighter non-resident lending and record numbers of new apartments stoke fears of an oversupply.

Also speaking at the Vow conference last week was Suncorp’s national manager for small business and commercial, Robynne Frost, who said the regional lender does not have a big interest in construction financing.

Her position was echoed by Liberty’s Sof Tsialtas who said, “We have never played in that market and we are still not playing in that market”, while Resicom director Stephen Mitchell admitted that “every lender is getting tighter and tighter”.

[Related: Economists warn of rising risks for off-the-plan market]