Foreign investment crackdown could see apartment projects shelved

A crackdown on foreign investment has led to fears that inner-city apartment projects will be shelved and sales may fall through.

As Australian banks tighten the screws on overseas buyers and the Chinese government reins in money flowing through underground banks, property pundits warn a spanner may be thrown at the wheels of Melbourne’s supercharged apartment market.

It may even ripple out to expensive homes in the suburbs favoured by Asian buyers, agents say.

The fears come as Westpac last week announced it would stop writing mortgages to non-residents, while other major banks have reduced loan-to-value ratios and tightened eligibility criteria. 

Foreign Investment Review Board rules state non-residents can purchase only new units and townhouses, making them prolific buyers in Melbourne’s off-the-plan apartment market.

Settlement defaults have not yet been felt, but experts say there are risks on the horizon. 

Angie Zigomanis, of BIS Shrapnel, said the market would be watching to see if settlement cracks started to appear.

“The proof will be in the pudding 12 to 18 months from now when the big projects heavily dependent of foreign buyers end up settling,” he said.

Jon Ellis, chief executive of investorist.com, said developers who did not clearly communicate with their buyers and give them forward notice on settlement dates would face delays in settlement and a portion of sales falling through.

“Two weeks out from settlement, loans should be approved and ready to be drawn down,” Mr Ellis said.

“Developers that are settling their projects within the next six months need to be really onto these changes and be making alternative arrangements for their purchasers to ensure they can settle.”

Mr Ellis said the company’s south-east Asian clients were all starting to make alternative arrangements to local banks, and finding overseas lenders who would lend them money to buy Australian assets. 

Mark Wizel, of CBRE, said that in the short-to-medium term, developers who were either close to launching new projects or selling existing projects could potentially see a slowdown in the rate of off-the-plan sales. 

Mr Wizel believed developers would be considering shelving projects because the developments could be “tainted forever” if they launched and didn’t sell enough to get it off the ground. 

“They’d probably just look at recalibrating, waiting a little bit longer to launch the project, with the view that they hope the policy may ease, and then they can launch the project with a bit more confidence,” he said. 

Construction giant Grocon’s head of development, Dan McLennan, said he did not think projects would be shelved but delivery would slow.

“We moved out of a booming market, whereby projects could be sold very quickly, with finance in place, to where they will just take longer,” he said.

Developer Future Estate’s managing director Ben Anderson didn’t believe there was a major risk because foreign buyers continued to have greater financial power than local investors.

He said the combination of tighter lending criteria, FIRB application fees and higher foreign buyer taxes created uncertainty and was sending negative signals to foreign buyers in Victoria – that they are not welcome and should consider investing elsewhere.

The Victorian government introduced a foreign buyer stamp duty surcharge and then more than doubled it to 7 per cent in just a year. 

“If you compare buying an apartment in Brisbane versus Melbourne, you’re $40,000 worse off,” Mr Anderson said. “It’s diluted our competitiveness.”

In the longer term, fewer apartments being built combined with increased demand for inner-city living and continued migration to Victoria could put pressure on prices and rents, Mr Wizel said.

Biggin & Scott Glen Waverley director Ming Xu said China’s crackdown on “underground money transfer” – whereby residents sidestep legal means to get money out of the country – and tighter lending criteria would affect mainly houses more than $2.5 million in the area. 

“[Foreign buyers] just can’t get the money out of China,” he said. 

“Lots of underground money transfer organisations have been closed, and also there is a $US50,000 ($68,000)  limit per person each year.

“At the beginning, they used their friends and families but that channel has already been closed by the government as well. The government checks whether the money goes out to the same account overseas.”