Stricter Credit Policy Restricts Buyers At Commercial Property Auctions of 2019

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Stricter Credit Policy Restricts Buyers At Commercial Property Auctions of 2019
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The Australian commercial property sector is expected to grow in 2019 as the unemployment rate is dipping and the demand for properties is continuing to rise. The vacancy rates are low in most cities which ensure an upward trend in the industrial and office property investment. However, the credit standards are putting obstacles in the path of the rising activity. The New Year has experienced the tightening of the lending standards which is feared to become a deterrent in buyers planning to make an investment.

The regulatory authorities - Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) - have ensured that banks maintain a constricted credit policy which means that they will be employing tougher measures to screen the loan applications. However, many leaders of banks are positive about the demand for credit and hope to provide loans throughout 2019 to buyers of commercial properties. These changes in lending terms are affecting certain sections.

In many of the recent property auctions held in Australia, investors had to unwillingly shell up to 20% more in funding which resulted in a lukewarm response. These commercial properties for sale in Australia managed to garner lesser than expected which brought the clearance rates down. However, negotiations after the auctions proved fruitful in gaining more sales in most cases.  

 

Why The Auctions Failed To Create A Buzz?

Although the turnout at these auctions was good, the clearance rate did not match the expectations of the sellers. The reason behind this is the challenges faced by the buyers in securing funds from banks and the vendors not doing enough to modify the prices to meet the demands of the changing market. The banks usually ask for a lot of information if it is the first purchase of the buyer. They check the assets and liabilities, financial information, ability to repay the loan and much more.

This means that you have to pass through a lot of security checks and deal with a lot of paperwork. This change has come close on the heels of the conclusion of the financial sector misconduct enquiry which involved Australia’s biggest banks and wealth managers. The crackdown on consumer lending policies was a preventive measure employed by the banks to follow the recommendations made by the quasi-judicial Royal Commission.

As a result, the process of lending has become longer due to the depth of investigation taking place. However, this doesn’t mean that the numbers will go down. The only change is that lending will become more responsible from now onwards and the prices will be stabilised by the end of the year. The quantum of loan being offered by banks is making the investors take a back step and think about affordability but has not put them off.

 

Things Are Looking Brighter In The First Quarter

Amid all the speculation of a downturn, many have pointed out that the auction clearance rates in February are better than those of late 2018. The clearance rates of auctions held in both Sydney and Melbourne during November and December were in the range of 40%. This is lower than 61% clearance earned from 521 auctions in Sydney and 54.2% from 657 auctions in Melbourne this year. The clearance rate may be down when compared with the last decade, but the sales are going strong as many negotiations are taking place after the auctions.

The only reason behind the slow start is the reduction in the amount that can be borrowed from the banks. While earlier investors were getting 70%-75% of financing from the banks, the percentage has come down to 50%-55%. Naturally, spending another 20% from their pockets is keeping the buyers from making the expected bids at the auctions. Consequently, the markets are cooling off as prices come down in both the housing sector and the commercial real estate.

The Royal Commission recommendations have not put forth any new laws and just asked the financial institutions to pay heed to the existing guidelines while lending money. The buyers may find it a bit difficult to get credit in the current scenario, but the picture is not as grim as some people are predicting. It is, in fact, helpful in maintaining the long-term stability of the financial market and the overall economy. Though many have been raising the question, whether the Australian commercial property market will crash, this doubt is far away from the truth.

 

Financing And Future Of The Property Sector

Besides banks, there are many non-traditional ways of securing finance and the brokers are playing an important part in bridging the gap by guiding investors. The property experts believe that the next six months will remain uncertain with the impending elections. As soon as the elections are over and things are stabilised, the investments will pick up speed and there will be a surge in prices. Also, it should be noted that although the property prices in Sydney and Melbourne are falling, other regions continue to show a spike.

With APRA taking away the cap on interest-only loans in December, lending will become somewhat easier. Looking at the brighter side, many experts suggest that this is a short-lived situation as the appetite for expanding the investment portfolio among the investors is not satiated yet. Things may have also cooled down due to the missing-in-action foreign investors, mainly Chinese buyers, who are now restricted due to capital controls and lesser funding available to foreign buyers. However, they are not slowing down and continue to put money in the commercial real estate which offers the advantage of low-risk as compared to the housing sector.  

Conclusion

Some investors are expecting tax policy changes after the Federal Elections if the Labour wins which can have an impact on the investments, but it cannot be predicted for sure. Whatever changes are brought about by the government, the bottom line is that it will not have a significant effect on the commercial property sector. Investors will not back off completely, and this will prove beneficial in bringing stability.   

 

Author Info Manish Khanna

Manish is founder of Business2sell Group of Websites. 

Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities. 

With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent. 

I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.

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