July 25, 2018

Lenders Have Had This Lightbulb Moment

A report from the Wall Street Journal. “Chinese investors have become net sellers of U.S. commercial real estate for the first time in a decade, reversing a yearslong trend when these buyers spent tens of billions of dollars and helped boost the market for hotels and other properties. Chinese insurers, conglomerates, and other investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to Real Capital Analytics. This marked the first time that Chinese investors were net sellers for a quarter since 2008. ‘I was shocked,’ said Jim Costello, senior vice president at Real Capital Analytics. ‘They really curtailed their buying and stepped up sales.’”

“Chinese lenders also want to avoid the painful repercussions that losses would cause. ‘If there is a fire sale, the banks also lose,’ said Edward Tse, chief executive of Gao Feng Advisory Co., a Shanghai-based consulting firm.”

From the South China Morning Post. “Shanghai has cancelled five planned land sales worth a total of 10 billion yuan (US$1.47 billion) in 20 days, underscoring dampened appetite of developers weighed on by tightened funding and tepid sales. Chinese developers are facing a liquidity squeeze and rising funding costs as a result of government’s deleveraging campaign and efforts to rein in housing prices.”

“‘The cancellation is probably due to the unattractive bidding prices that developers intended to make,’ said Alan Jin, property analyst with Mizuho Securities. ‘The developers are suffering a rough time facing the price cap and tightening credit. It dose not make sense for them to bid high.’”

“The cooling land market is not limited to Shanghai. On Monday, Suzhou, a city near Shanghai, also said three plots planned for sale failed to find buyers. In Shenzhen, 26 parcels of land were sold in the first half, fetching 10.9 billion yuan, down 67 per cent from the same period last year. In June, a commercial site with development for housing in Qianhai, the city’s new financial district reportedly failed to sell. Country Garden, the country’s largest developer by sales, in June has order a halt of land acquisition in third, fourth and fifth-tier cities, scaling back a previously ambitious plan to be present in all counties in China, according to Shanghai media the Paper.”

The Sydney Morning Herald in Australia. “Australia’s version of the sub-prime crisis that ushered in the global financial crisis could be looming, with a significant number of the 1.5 million households with interest-only loans likely to struggle with higher repayments, experts warn. Martin North, the principal at consultancy Digital Finance Analytics, said interest-only loans account for about $700 billion of the $1.7 trillion in Australian mortgage lending and it was ‘our version of the GFC.’ ‘My view is we’re in somewhat similar territory to where the US was in 2006 before the GFC,’ Mr North said.”

“Craig Morgan, managing director of Independent Mortgage Planners, said one in five people who took a loan two or three years ago would not qualify for the same loan now, because of the crackdown on lending by the regulator and ongoing fallout from the Royal Commission into financial services. ‘In the last six months lenders have had this lightbulb moment of what ‘responsible lending’ means,’ Mr Morgan said.”

From Bloomberg on India. “Indian lenders struggling to recoup loans worth about US$20 billion to troubled property developers have to contend with another challenge: A lackluster recovery from the worst home-sales slump this decade. To recover the dues, banks are taking control of land parcels and unfinished projects that can be sold along with loans. This comes at a time when home sales volumes have declined about 40 per cent over four years and prices have dropped as much as 20 per cent on average, said S Sriniwasan, managing director of Kotak Investment Advisors, which oversees the alternate assets business of parent Kotak Mahindra Bank Ltd.”

“‘Weaker hands are going out of business in realty and lenders are working on recovering US$20 billion worth of stressed loans to developers,’ said Mr Sriniwasan, who has been bidding to buy properties that banks are putting on the block. ‘All those land banks, which developers used to tout as a valuation booster, are turning into bank lands now,’ and creditors will have to take haircuts while selling the collateral.”

“‘This US$20 billion stress is just at banks. We don’t even know what level of non-performing loans is there in non-finance companies’ books since their recognition norms are more relaxed and bad loans are not really coming out,’ he said. ‘The day of reckoning is not far.’”

From IOL News in South Africa. “An increase in To Let signs is being seen in Cape Town’s city centre, which has enjoyed a property boom for a decade. Property companies have cited the drought, the weak economy and an oversupply of residential properties as the main reasons for a decrease in demand for apartments to rent and more properties staying on the market. In the past five years, prices of homes across the city have risen by nearly 80%, making Cape Town’s properties the third most expensive in the world after Shanghai and Vancouver.”

“Steer & Co said the drought had also resulted in fewer visitors to the city and property owners previously letting their properties short-term now had to switch their properties into the long-term letting market as the short-term vacancies were high. This had in turn led to a large amount of new rental stock coming onto the market, creating even more supply. Spokesperson Teresa Hamilton said the situation was causing alarm or ‘at least disappointment’ among some property owners.”

From Insauga on Canada. “The GTA’s new home market is facing some challenges. The Building Industry and Land Development Association (BILD) announced that through the month of April, the new home market had lower sales than usual, which resulted in an increase in remaining inventory. In total only about 1,727 new homes were sold in April. April sale were the lowest for the market in over 20 years. Single-family home sales were down 65% from last April of last year. This was also 70% from the 10-year average. Condominium apartments came out to 1,225 new home sales, which was down 65% from April of last year as well, and down 38% from the 10-year average.”

“The low number of sales is troubling for the market. The total new homes remaining in inventory are about 14,297 units. The benchmark for new single-family homes decreased in April to $1,151,815. This is down 5% over the last year.”

The Delta Optimist in Canada. “The rate at which presale condos and townhomes are being snapped up has plummeted across Greater Vancouver and the Fraser Valley. MLA Advisory said in its mid-year report that the absorption rate of newly released presale units in June 2018 across the Lower Mainland was just 50 per cent, compared with 94 per cent in January this year. ‘The current pre-sale landscape is shifting from its once unsustainable, hyperactive growth to a balanced, more normal market,’ said Suzana Goncalves, chief advisory office at MLA Canada.”

“The anticipation of slower sales and potentially lower prices could be encouraging some pre-sale buyers to sell their sales contracts, known as assignments. A look at listing services Craigslist, Kijiji and Vancouvernewcondos on July 18 found 587 presale condos being offered from West Vancouver and Squamish to Surrey and Langley by both real estate agents and private owners.”

From Property Industry Eye on the UK. “There has been a ‘significant’ rise in down-valuations which are now running at the highest rate since the crash in 2008. The Victoria Derbyshire Show yesterday looked at the problem, with Russell Quirk one of the contributors. Quirk, CEO of Emoov, said that one in five of its transactions is currently being down-valued by surveyors after the sale has been agreed. Two years ago, it was fewer than one in 20. Quirk said it reflected surveyors predicting a crash, and that they were covering their backs. He said: ‘Surveyors are prophesying a crash. The system is built to protect them.’”

“Comments on the BBC forum included a question about what was making lenders nervous – Brexit? Another said: ‘House prices are way too high relative to earnings and the bubble must burst at some point. And that may be soon.’”

From Yle Uutiset on Finland. “Anja Soininen would like to sell her home and move closer to her son’s family, but there are no interested buyers for her property in Polvijärvi, eastern Finland. Her three-room house with a sauna and ‘nice neighbours’ has been on the market since May. ‘If only I could sell it by the autumn; I hope that someone would show an interest,’ she says.”

“She might have to wait longer, however, as it is not uncommon for dwellings outside Finland’s growth areas to sit unsold for several years nowadays. Sami Pakarinen, chief economist for the Confederation of Finnish Construction Industries, told the financial paper Kauppalehti in 2016 that one million of Finland’s housing units are ‘in the wrong place.’ ‘For the last 25 years, we’ve been building a lot of housing in the wrong places, when you think about future needs. If we’ve got three million units, then a rough estimate would say that one million of them are in the wrong places,’ he said.”

“Markku Tykkyläinen, a professor of economic geography at the University of Eastern Finland, says problems arise when people’s only capital is the home they live in. Unfortunately, a person’s dwelling is not the best long-term investment, he says, even if the homeowner would wish that it were so. ‘The situation has now grown acute: houses in small communities are being put up for sale, but there are no young people interested in buying them,’ he says of the situation in Finland.”

“One reason the sale of older homes has dragged on for years in some instances is because the sellers have refused to lower their prices. Anja Soininen hopes to get 68,000 euros for her small home in Polvijärvi, and she says that for the time being, she has no intention of backing down on the price. ‘There have been so many expenses that I want to get my asking price,’ she explains.”

“But even if she were to end up dropping her price, it may not help attract a buyer. The Joensuu-based Karjalainen newspaper recently carried a story of an apartment owner in Outokumpu, eastern Finland who dropped the price of her 90-square-metre flat from the original asking price of 80,000 euros to 33,000 euros – and the flat still hasn’t sold.”