BFCSA: The pipeline of units under construction reaches a record high: Huge Settlement RISK

The pipeline of units under construction reaches a record high

by Cameron Kusher

25 July 2016

http://www.macrobusiness.com.au/2016/07/pipeline-of-units-under-construction-hits-record-high/

Core Logic’s Cameron Kusher has published an interesting post examining dwelling construction trends at the national level, which shows that the construction of units is tracking at record highs with more in the pipeline:

At the end of March 2016 there were 215,863 dwellings under construction nationally, 63,414 of which were houses and 152,449 which were units…

While the number of dwellings under construction is at record highs we are also seeing an elevated number of houses and units which have been approved for construction but not yet commenced. At the end of March 2016 there were 8,817 houses and 24,175 units which had been approved for construction but not yet commenced…

The record-high number of dwellings under construction and the continuing strong pipeline of approvals should ensure that there is plenty of work for the construction industry over the coming years. There is the concern of over-building in certain areas especially considering in certain locations much of the new unit supply in particular is targeted at an investor rather than owner occupier market. We would expect that over the coming quarters an increasing proportion of dwellings, particularly units, which are approved for construction will not be commenced. This is largely due to challenges with securing enough presales to trigger commencement of these projects.

The upshot is that rents, which are already falling, should remain under ongoing pressure as the new supply continues to hit the market.

Full report here.    http://corelogic.com.au/news/the-pipeline-of-units-under-construction-reaches-a-record-high

http://corelogic.com.au/news/settlement-risk

Settlement Risk

by Craig Mackenzie

27 July 2016

With an unprecedented number of units approved for construction it is incumbent that property and mortgage finance industries manage the settlement risk.

Over recent years we have seen an unprecedented number of units approved for construction. This is self-evident by observing the cranes dominating many of our capital city skylines.  There are several factors creating an increased demand for units. These include:

• An attractive price point (units tend to be much cheaper than houses);
• Greater demand for inner city living reflecting the changing demographics;
• Increasing demand for Australian property from overseas investors; and
• Government planning initiatives aimed at increasing high density living along the major transport spines.

Whilst demand for unit stock has undoubtedly increased, there are concerns that new supply has effectively overshot the mark in particular geographic locations, increasing concerns around the risk attached to some projects currently under construction.

Connected to this oversupply risk, concern is growing that pre-settlement valuations may come in much lower than the actual contract price for some off-the plan unit sales and, as a consequence, a proportion of the contracted sales won’t proceed to settlement.   There are a number of reasons why an increasing settlement risk exists for units:

1. The level of new unit construction is currently at unprecedented levels, with a record-high number of settlements due over the next two years.
2. In many regions, capital growth has been substantially lower for units than for houses. Many off-the-plan unit buyers would have expected a higher level of capital growth between exchange of contract and settlement, which in many cases has not eventuated.
3. Mortgage lenders have tightened their lending criteria and some have a reduced risk appetite to investors, impacting on the availability of finance to complete these purchases.
4. There is a strong degree of geographic concentration of new unit stock, particularly in Melbourne and Brisbane, which will compete with existing unit stock.
5. Three of the four major banks have recently announced more restrictive lending policies to non-resident borrowers, which is potentially significant given a material proportion of off the plan unit sales are to overseas buyers.

It is incumbent on the property and mortgage finance industries to manage this risk in a proactive manner to ensure consumers are not ‘blind-sided’ and that any downside risk is mitigated to the greatest extent practicable.

Sydney and Melbourne predictably have the greatest number of expected unit settlements over the coming 24 months. When you compare the number of new units set to settle compared to average unit sales over the past 5 years you can see there is a substantial disconnect. Particularly when you consider the market does not only consist of new unit sales but also resales.

With the mortgage market changed over recent years and unprecedented levels of unit settlements set to occur, it is going to be a challenge for all of these units to successfully settle. Moreover, given value growth is expected to slow it will be interesting to see if and how these units maintain their value.