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Settlement risk yet to peak

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By Tim Lawless

Recent building activity data released by the Australian Bureau of Statistics (ABS) showed that the amount of new supply flowing into the unit market across Australia is unprecedented. What’s concerning is that settlement risk is yet to peak.

Based on building activity data, there are approximately 153,000 units currently under construction nationally, with the vast majority of this stock likely to have been purchased ‘off-the-plan’. To provide some context, the scale of unit construction over the September quarter of 2016 was 86% higher than the decade average and 141% higher than the twenty-year average.

It’s probably safe to say that the number of units under construction moved through the peak early last year. Unit approvals reached a record high in October 2015 and have been trending lower since that time, and unit commencements peaked in March 2016, which coincides with a levelling in the number of units under construction.

The next phase in this unprecedented unit construction boom will be the completion and settlement of these 153,000 units. There is already evidence that a large proportion of settlement valuations are coming in at less than contract price. In fact, metadata from CoreLogic valuation platforms shows approximately 45% of off-the-plan unit valuations are less than the contract price at the time of settlement.

There are several risks for off-the-plan unit buyers; if their valuations are coming in low, they are facing an immediate negative equity situation at the time of settlement. The other complication is that buyers may need to top up their deposit in order to meet the lenders’ loan to valuation ratio requirement. Some buyers may be unable, or at the least, unwilling, to contribute more capital at the time of settlement. When settlements aren’t able to occur, this creates problems for developers and financiers who had considered those properties to be sold, and will need to find a replacement buyer.

With a surge in unit settlements just around the corner, it’s likely that settlement risk will become more pronounced over the remainder of 2017. Unit projects that have some differentiation based on their location, the quality of the developer and development, as well as a healthy mix of owner occupiers and investors are likely to demonstrate a healthier settlement profile. However, unit stock located within the supply epicentres and offering little in the way of differentiation are likely to be the most at risk of negative equity at the time of settlement.

Published: Tuesday, March 21, 2017


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