KKR, Oaktree drop overseas loans

The Australian 12:00am March 25, 2019

Joyce Moullakis

Global private equity heavyweights KKR and Oaktree Capital have pulled the pin on a venture providing non-resident home loans to buy Australian property as faltering demand hits their business model.

The venture has stopped lending just 12 months after a high-profile launch. The parties were seeking to capitalise on a retreat by the big four local banks from lending to foreigners or those who derive swathes of income from offshore.

The partnership between a unit of KKR and Oaktree, called Blue Lotus, largely targeted buyers from China.

A KKR spokeswoman yesterday confirmed the wind-down of the lending platform.

“Blue Lotus and its backers regret this outcome because of the significant time and effort committed to establishing the lending platform, but it is the right commercial decision at this time,” she said.

“Blue Lotus will continue to settle loans for which it has issued final approval on or before March 18 and which proceed to settlement in accordance with such approval. Blue Lotus will otherwise not proceed with any other loan applications.”

Non-bank lender Pepper Australia, which was acquired by KKR’s credit division in 2017, was providing loan servicing to Blue Lotus. The platform was more than 12 months in the planning and preparation stage ahead of the domestic housing market starting to cool.

Sources said Oaktree had difficulty meeting its return targets from the venture and had been pushing to end it.

The major banks have largely stopped lending for homes to non-residents over the past three years due to higher risks and difficulties and costs around verifying income and identity. That has left potential borrowers seeking ­alternatives such as Blue Lotus, Fortress Investment Group, Columbus Capital and La Trobe Financial.

Three years ago, the Reserve Bank told the market that while the major banks’ direct exposure to Chinese property investors appeared small, if Chinese demand were to “decline significantly, that could weigh on domestic property prices”.

The decision by KKR and Oaktree to exit is linked to a sharp drop in investment in residential real estate by Chinese buyers.

Proposed investment by Chinese investors in residential real estate was worth $12.5 billion in 2017-18, tumbling almost 60 per cent from the previous financial year, according to the Foreign Investment Review board’s latest annual report.

While FIRB noted softer demand, it said China still accounted for a majority of international residential real estate approvals in Australia.

In the same report, FIRB said the Tax Office had conducted 1400 reviews across all foreign property purchases and identified 600 properties in breach of the investment framework. That led to one-fifth of the properties being sold and in most circumstances a financial penalty.

Carrie Law, chief of international real estate website Juwai.com, last month told The Australian there were several factors curtailing Chinese demand for Australian residential property.

“Chinese buying in 2017-18 was most impacted by three factors — unexpected cancelling of promised mortgage loans by Australian banks, higher foreign stamp duty and capital controls making it more difficult to move money from China,” she said.

Several state governments have also imposed higher thresholds of stamp duty for nonresidents buying property, while FIRB needs to sign off on home purchases by foreign investors and temporary residents.

The Blue Lotus venture was understood to have been domiciled in the Philippines and complied with regulations and laws where the borrowers were based.

Global private equity firms have made a big push into Australia’s mortgage market in the past two years. KKR acquired Pepper, Bluestone’s Australian operations are owned by Cerberus Capital and Blackstone took an 80 per cent stake in La Trobe.